2023 Weekly Views

Highlights

On rates

The week for rates was marked by greater optimism on the debt ceiling and those hawkish remarks from Fed officials. US Treasuries sold off across the curve. For instance, the 10yr yield (+21bps) rose for 5 consecutive sessions to a post-SVB high of 3.67%. At the very front end, the pricing of further rate hikes meant that the 3m yield (+6bps) closed at a fresh post-2001 high of 5.22%. 2yr yields rose +28bps and are now +44bps above where they were intra-day last Thursday and +59bps above the lows from the prior Thursday, which was just after the last FOMC meeting. US 1M Treasury yields (x-date sensitive) were down -9bps over the week to 5.32%, that is their lowest closing level since May 5. The 1M yield is now down -263bps since its highest closing levels on Monday, having peaked intraday then at 5.58%, which is the all-time high for the security since they were first issued in late-2001. The spread of the 1M treasury yield remains 14bps higher than the 1M OIS overnight swap rate (which controls for the fed funds rate) after peaking at 44.5bps back on Monday as well, which is higher than we saw during the 2011 (5.3bps) or 2013 (23.8bps) debt ceiling episodes.

Market update

Debt ceiling optimism

The S&P 500 closed the week at 4,191.98, +1.65% higher. The Dow Jones closed at 33,426.63, +0.38%, with the Nasdaq higher by +3.04%. The volatility index VIX closed the week at 16.81 down from 17.03. The Euro Stoxx 600 gained +0.72%.

The 10-year UST closed at 3.67% up from 3.46% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -159bps. US Corporate Bond spreads: Investment Grade remained at 215bps and High Yield tightened 14bps at 504bps. German 10-year Bunds yield closed at +2.43% up from +2.28% a week before. In Europe, Corporate Investment Grade spreads widened 2bps at 185bps and High Yield spreads tightened 26bps at 485bps.

The US Dollar Index (DXY) appreciated +0.50% last week and closed at 103.20. The Euro closed at 1.0805 (-0.41%); the Yen depreciated -1.68%, closing at 137.98 and the Swiss Franc depreciated -0.25%, closing at 0.8997. Gold closed at $1,977.81 depreciating -1.64%. Oil was lower, Brent closed at $75.58 (+1.90%) and WTI at $71.55 (+2.16%).

Macroeconomy

Debt ceiling

For most of the week there was growing optimism that US leaders were getting closer to reaching a deal on the US debt ceiling. Before Friday, comments from Republican Speaker McCarthy, who said “I can see now where a deal can come together”, and that the negotiators were in a “much better place”. Furthermore, he even said he expected the House to consider a deal next week, with an “agreement in principle” possible during the weekend. However, on Friday, debt limit talks hit a wall as the GOP negotiators walked out on negotiations. The latest is that President Biden and House Speaker Kevin McCarthy will meet at the White House today to resume negotiations. There was a slightly more positive tone from both sides after a phone call between the two yesterday Sunday. Yellen said over the weekend that the chances that the US can pay its bills by mid-June are "quite low".

Fed speakers

Several Fed speakers pushed back on the idea that the Fed were about to reverse rates anytime soon. Atlanta Fed Bostic said that “we won’t really be thinking about cutting until well into 2024”, which is at odds with market pricing that’s expecting 94bps of cuts by the time of the January 2024 meeting. Minneapolis Fed Kashkari said that “We at the Federal Reserve probably have more work to do on our end to try to bring inflation back down”. One dovish exception came from Chicago Fed Goolsbee, who mentioned that there was “still a lot of the impact of the 500 basis points we did in the last year that’s still to come”, so explicitly warning of policy lags. Cleveland Fed Mester said that rates weren’t sufficiently restrictive just yet, and that “given how stubborn inflation has been, I can’t say that I’m at a level of the fed funds rate where it’s equally probably that the next move could be an increase or a decrease”. Richmond Fed Barkin said that “if more increases are what’s necessary” to reduce inflation then he was “comfortable doing that.” Dallas Fed Logan said that “we haven’t yet made the progress we need to make” on inflation, and that “we aren’t there yet” in terms of it being appropriate to pause rate hikes. An FT interview with St Louis Fed Bullard came out, who said that the situation “may warrant taking out some insurance by raising rates somewhat more to make sure that we really do get inflation under control”. On the more dovish side, Governor Jefferson said that “a year is not a long enough period for demand to feel the full effect of higher rates.

Inflation expectations

US retail sales increased in April by +0.4% (vs. +0.7% expected), suggesting consumer spending is holding up. However, it contrasts with results from several consumer companies. Foot Locker, whose shares plunged 27% after the company said lower tax refunds and higher prices for gas, food and rents are hurting its customers' ability to spend on discretionary goods. Home Depot, which fell 2% on Tuesday after comparable sales missed estimates and guidance came in light. Target said its sales barely grew y-o-y, while a soft forecast was issued due to inventory impacts and retail theft. The macro data may be just as important as individual earnings. US April retail sales recorded their first upswing since January, but the 0.4% monthly expansion was still below the expected figure of 0.7%. In terms of y-o-y numbers, things have been steadily declining since last July, with the latest print coming in at 1.6% (and below the 4.9% inflation rate for the same period). Consumers have also continued to shift away from goods spending like furniture, home appliances and electronics (which was the most sought goods for during the pandemic) into services spending such as restaurants, health and personal care.

Global central banks

In Canada, CPI reading unexpectedly rose in April. It showed inflation rising to +4.4% (vs. +4.1% expected), which ended a run of 5 consecutive monthly declines in headline inflation. In turn, investors dialed up the chances that the Bank of Canada might hike rates at the next meeting following their recent pause, with overnight index swaps now seeing a 35% chance of another 25bps move in June. In Australia, the minutes from the Reserve Bank of Australia indicated that still sees further rate hikes “may be required”, depending upon how the nation’s economy and inflation evolve. Finally, the People's Bank of China (PBOC) offered to keep the rate on 125bn yuan ($18bn) worth of one-year medium-term lending facility (MLF) loans to some financial institutions unchanged at 2.75% for a ninth month. The central bank’s operation added 25bn yuan more than the amount maturing in May, to keep the economic recovery on track as credit growth slumped.

What to watch

• Monday: Switzerland industrial production (Q1); Eurozone Consumer confidence (May)
• Tuesday: US New home sales (May); US Services & Manufacturing PMI (May); Eurozone Services and Manufacturing PMI (May)
• Wednesday: Japan Tankan Index (May); UK CPI (Apr.)
• Thursday: US Pending home sales (Apr.); US: GDP (Q1)
• Friday: Japan Tokyo CPI (May); US Durable goods order & Core (Apr.), Core PCE (Apr.), Personal spendings (Apr.), Michigan consumer expectations & sentiments (May)