Markets are bouncing back ahead of the weekend

Published Date 10/21/2022

The 10 yr. note and the reset of the curve started with more volatility this morning, the 10 yr. at 7 am ET 4.32% +9 bps, at 9 am 4.25% +2 bp. The 10 and 5 yr. notes this morning the highest in 15 years. The yield on 10 headed for a 12-week streak of increases that would match the duration of the 1984 episode when then-Fed Chairman Paul Volcker was carrying out a series of rapid rate increases. The yield on US five-year notes surpassed 4.5% for the first time since 2007, while 10-year notes jumped nearly 11 basis points to 4.34% last night before backing off when US trading began. The yield on US five-year notes surpassed 4.5% for the first time since 2007, while 10-year notes jumped nearly 11 basis points to 4.34%. Federal Reserve officials are likely to raise interest rates to “well above” 4% this year and hold them at restrictive levels to combat inflation, Federal Reserve Bank of Philadelphia President Patrick Harker said yesterday.

Rates around the world are tracking US increases. The ECB will meet next week with a 90% chance it will increase rates by 75 bps following the 4 75 bps increases from the Fed. German rates jumped when its parliament approved a plan to borrow as much as €200 billion ($195B) to tackle the energy crisis as well as the required suspension this year of a constitutional limit on net debt.

There are no data points today, looking at next week’s calendar, there are no economic releases that will directly impact interest rates until next Friday when the PCE inflation for Sept is released along with personal income and spending.

The FOMC on Nov 2nd will increase the FF rate by 75 bps. The issue at the meeting will center on what to do at the Dec meeting. There is growing belief the Fed will ease the increase in Dec by just 50 bps but the debate between now and then will be intense “We will have a very thoughtful discussion about the pace of tightening at our next meeting,” Fed governor Christopher Waller said in a speech earlier this month. Fed doesn’t want to drive the economy to a hard landing, a huge challenge when the idea is to lower inflation. Recession is more likely every day, Europe can’t avoid recession, the US also not likely to dodge the bullet. Employment still holding well, net income slowing as price inflation eats up any wage increases, spending headed into holiday shopping will be key. Gas prices recently did decline but not likely to stay low with the US starving for oil imports and producers keep prices from declining.

At 9:30 am the DJIA opened -59, at 10 am +361, NASDAQ opened -45, at 10 am +59, S&P opened -10, at 10 am +35. Volatility is the definition for US markets this morning.

MBSs at 9:30 am were soft; by 10 am prices reversed, and the losses were erased when the 10 yr. yield slipped back from the extreme highs this morning. The middle of the curve actually lower, 2 yr. -7 bps, 5 yr. -5 bps.

Source: TBWS

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