Prior Week Summary
Over the course of the last few months, the perceptions for the likely path forward for the Fed Funds target rate have fluctuated wildly. Following the Fed hike in December, market based variables suggest that traders have vacillated between pricing in as few as one hike over the course of the next 2 years at their most pessimistic point and as many as 3 and a half hikes over the same time frame at their most optimistic. However, it stands to reason that actual economic demand, growth, and inflation prospects have not been as volatile as the market’s reactions to any individual data point would suggest.
Following the Labor Department’s report on Friday that employers added the fewest number of workers to payrolls in almost six years, rates cratered, and with them, the expectation for a hike in July. Over the course of the last week, the curve has reset meaningfully lower, falling approximately 10 basis points lower in yield at the 2-year point, and 12 basis points at the 10-year point. Futures are now pricing in approximately 1 hike for the remainder of 2016, with roughly coin flip odds for Fed action at the December meeting. Some more aggressive market commentators and economic forecasters have even begun to increase calls for additional quantitative easing (QE4) by the Central Bank here in the U.S.
The Look Forward
The market won’t need to wait long before hearing the perspective of Fed Chairwoman Yellen, who is scheduled to speak at the World Affairs Council in Philadelphia on Monday, during an otherwise slow week for data. Later in the week, the market will get updated information on the state of the labor markets, wholesale inventories, and consumer sentiment. A number of auctions on tap this week as well, with $24B 3-yr notes, $20B 10-year notes, and $12B of 30-year bonds expected to price throughout the week.