3-24-14 Weekly Interest Rate Market Insight

3-24-2014 Weekly

  • While everything in the policy statement from the Federal Reserve was forecasted accurately, with highlights being no change to the target rate, another $10 billion of tapering, and removal of the 6.5% unemployment level as a threshold for raising said rate, Chair Yellen managed to rile markets notably in her first quarterly press conference.  The resultant steepening of the yield curve made for some great drama that will continue as the bond market gets comfortable with higher implied rates.  The quarterly economic forecasts that accompanied the March meeting consisted of reduced GDP and unemployment high ends of their ranges, flat core inflation consensus, and an average expectation for the target rate that rose +0.04% to 0.34% at December 2014, +0.07% to 1.13% to close 2015, and +0.24% to 2.42% at the end of 2016.  Coupled with Chair Yellen’s equating the “considerable” amount of time after QE ends before the target rate might rise to roughly six months, the front end of the yield curve got crushed and yields rose 10-17 bps from the 2-5 year range, while the 30-year bond stayed relatively flat.  Even though core inflation guidance stayed below worrisome levels, look for the Fed to get near-term dovish in their speeches after this likely-unintended result from the comments, or expect LIBOR to rise faster if you think the hawks will gain even more traction.  Equities managed to get through the Fed meeting and end higher for the week, although the intraday record high for the S&P 500 did not hold from midweek.  On the data front, business surveys out of Philly Fed and Empire State Manufacturing were relatively positive, housing starts and existing home sales were in line with expectations as permits rose more than expected, consumer inflation (CPI) remained muted, jobless claims held relatively low at 320k for the week, and leading indicators rose 0.5% MoM after a 0.2% revision downward for January.  Industrial production and capacity utilization both jumped MoM.  With the rate of purchases of MBS and Treasuries now down to $55 billion a month, the current pace of reductions and the schedule for FOMC meetings puts an end to QE either in late October or mid-December, depending how the extra $5 billion is handled.
  • Treasury will auction into the sensitive front-belly of the curve this week, with $96 billion of 2-, 5-, and 7-year paper coming.  Several Fed presidents are speaking this week and should dispute the assessment of rhetoric from last week.  The final revision for Q4 2013 GDP will be released on Thursday, with expectations for 2.7% QoQ annualized economic advancement and 1.6% higher prices.  Durable goods orders likely advanced 1% MoM, but transportation will have a lesser effect on February numbers.  FHFA and S&P Case-Shiller update housing prices (both likely up +0.5% MoM or so), personal income and spending are expected to both rise 0.3% MoM, and core PCE inflation should be 1.1% YoY.

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