Economic and Interest Rate Outlook
The market has shown strength the first two weeks of the year. A combination of factors including softer than expected Payrolls last Friday, better than expected treasury auctions, and dovish talk from the Fed have driven a sharp move lower in 2010 after a 60 basis point run up into the year-end of 2009.
We continue to see the 10 Year Treasury trade within the range of the 2nd half of 2009—unable to break 3.85% on the high side and 3.20% on the low end. The economic data has improved but not to the point where it is evident that the Fed is prepared to start hiking its target rate. New Treasury supply continues to come, but there is obvious demand for it as evidenced by the solid auctions this week. Every time the 10-Year Treasury rate starts to head toward the high end of the range, buyers emerge and the market rallies. Lack of an imminent move higher in inflation, combined with employment weakness are the key catalysts for fixed income buying at these levels. There are no auctions scheduled for next week, so corporate earning and equity prices will be the primary drivers of the bond market.
The Consumer Price Index excluding the volatile Food and Energy Components showed prices rising 0.1% in December (as expected) and the Fed’s Beige Book characterized the economic conditions as improving modestly. Capacity Utilization inched up higher than expected in December to 72%, the highest level of the past year. Tempering the bullish news this week was a higher than expected initial jobless claims number.
As you might expect, the Fed Funds Futures market lowered its expectations for Fed rate hikes over the course of the week as rates fell. The market still sees about a 30% chance that the Fed will raise it Target rate to 0.50% in August but will certainly move the probability after we see 4th quarter earnings from the Fortune 500
A big thank you to Eric Better of Better Capital for providing this report!
No comments:
Post a Comment