Still trying to figure out inflation……….and the Fed
- Based on the CME Fedwatch tool, bond traders are no longer predicting that the Fed will cut interest rates by more than 75 basis points this year – their view finally now moving in line with what has been the central bank’s projected likeliest outcome for months. To this end, the benchmark U.S. 10-year Treasury has hovered in a tight range between 4.25% and 4.33% in recent day.
- With the focus remaining on the Fed, investors have been bracing for tomorrow’s critical inflation release which is likely to strongly affect the Fed’s mid-March meeting. The Thursday release of the Personal Consumption Expenditures (PCE) prices report is eagerly awaited on Wall Street after data earlier this month called price growth progress into question. Investors have already backtracked dramatically from previous hopes for rate cuts starting in March, and a disappointing PCE report could further reinforce “higher for longer” concerns regarding Treasury yields.
- Additionally, the wave of consumer optimism finally broke this month as the Conference Board’s consumer confidence index fell for the first time since November. Labor market uncertainty as well as the coming election, though not inflation, poured cold water on the survey, which was expected to show confidence having held steady at a two-year high.
- On the global stage at this week’s G-20 meeting, Treasury Secretary Janet Yellen cited central bank interest-rate hikes around the world as one potential risk to a generally favorable economic outlook. She also noted that “inflation has been coming down in many countries,” while stopping short of suggesting that rate cuts might now be appropriate. Geopolitical risks pose another danger, with “significant economic spillovers” in the case of an expanded regional conflict in the Middle East, Yellen said.
- On a more positive note, the likelihood of yet another federal government shutdown this weekend appears to be fading. Congressional leaders expressed confidence yesterday that they could avoid a partial government shutdown on March 1 after meeting at the White House with President Joe Biden. We hope that this optimism is warranted as the repeated government shutdown ill serves members of all political parties.