Prior Week Summary
It was a light week for economic updates and rates markets were largely driven by central bank communications, corporate earnings, and a strengthening dollar. The Labor Department set the tone for the week’s curve flattening with the release of the September CPI report, which detailed a softening of the core inflation rate. Core goods prices declined 0.1% in September, bringing the year-over-year decline to 0.6%. The recent and growing strength of the dollar relative to our trading partners suggests the weakness in the price pressure on goods in the CPI basket may persist for a time. Against this backdrop, the FRBNY reduced their estimate for Q3 GDP growth by 0.1% and Q4 GDP lower by 0.2% to 1.4%.
The European Central Bank president, Mario Draghi, added to the curve flattening pressure when he suggested that the bank had not even discussed the end-game of its current €80 billion a month bond purchase program – and simultaneously suggested the program may continue past its current scheduled ending date. Mr. Draghi elaborated that the Bank remains “Committed to preserving the very substantial degree of monetary stimulus which is necessary…my perception is that a sudden stop is not in anybody’s mind.”
The continued expectation for stimulus from the ECB was matched on Friday by statements by the Japanese Financial Services Agency implying that it’s banks were being overly strict in lending standards and encouraged regional banks to lend more to borrowers with non-traditional credit criteria.
Overall, the curve flattened in the Treasury market on a week-over-week basis, led by strength on the long-end where yields fell 6 to 7 basis points, relative to a 2 basis decline in front-end yields.
The Look Forward
Another moderate week for data releases on deck with updated releases expected for home prices, manufacturing activity, and wholesale inventories. The Fed’s Bullard is scheduled to speak on the economy and monetary policy on Monday at the conference of the Association for University Business and Economic Research.