2/24/23 – Bond Yields Continue to Push Higher
This holiday shortened week was free from the wild, unexpected economic data we’ve been seeing since the start of the year. Activity continues to surprise to the upside as has the inflation backdrop. Existing home sales fell -0.7% from last month’s measure, while the second look at Q4 GDP was revised lower to 2.7% from 2.9%. The most eye-popping of the week’s data, the Personal Consumption Expenditure price deflator, the Fed’s preferred measure of inflation, rose 5.4% year-over-year. That measure, when paired with the above expectation CPI released mid-month has taken the steam out of the nascent bond rally that started the year.
Reacting to the data, traders continued to push bond yields higher. The two-year note closed the week at 4.81% as it pushes above the overnight Fed Funds rate on its way to 5.00%. Similarly, the deeply inverted 30-year bond rose marginally to 3.94%. Speculators are now looking for Fed Funds to peak at 5.40% by August of this year, but there was talk on Friday that the rate will need to go to 6% to contain inflation.
Equities continue to react to the Fed’s renewed hawkishness and ongoing economic strength, with the S&P 500 closing the week below 4,000, nearly 18% below last year’s high.
Typically, the monthly employment report is released on the first Friday of the month but because of the quirk of the calendar this year, the report will not be released until March 10th. Despite that, there will be plenty to drive the market next week, led by durable goods, pending home sales and a full complement of ISM data.
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