The week in review
- Mfg./Services PMI: 48.5/55.1
- New home sales: 4.1% m/m
- Headline/Core PCE: 4.4%/4.7% y/y
The week ahead
- JOLTS
- Nonfarm payrolls
Thought of the week
10-year Treasury yields have climbed by roughly 38bps to 3.80% in May, their highest level since SVB collapsed, reflecting the market’s improved optimism for economic growth and shifting expectations for monetary policy.
Relative strength in recent data and corporate earnings has painted a brighter picture of economic activity. This week in particular, consumer spending and initial jobless claims highlighted continued economic resilience. Consumer spending came in stronger than expected, rising 0.8% m/m, while initial claims came in below expectations at 229K along with a meaningful downward revision to the prior week’s data. Moreover, recent stabilization in regional bank deposit outflows has helped calm worries of a broader fallout in the banking sector. As such, markets appear to be taking the Fed’s guidance of no rate cuts in 2023 more seriously. The futures market had expected three full cuts in 2023 following May’s FOMC meeting, but now only expect one full cut by year-end. Furthermore, a hike in June seemed improbable earlier this month, but markets are now roughly assigning a 69% probability of another hike at the next meeting.
However, this resilience could be short-lived as the economy and inflation resume a slowdown, so yields may struggle to move higher from current levels. Looking to 2024 and beyond, both markets and the Fed expect rates to come down meaningfully. As shown in this week’s chart, when the Fed has cut rates during previous cycles, bonds have significantly outperformed cash. Investors still holding excess cash might be well served to take advantage of this opportunity to add duration to portfolios.
