Treasuries have retraced the dip in yields that occurred following the March 20th FOMC meeting and it’s occurred with mostly middling economic and earnings releases. Given the modest rebound in most economic releases of late, the back-up in Treasury yields speaks perhaps more to the overzealousness in expecting rate cuts later this year after the Fed meeting which drove yields to yearly lows. The revised thinking is that with the economy showing more signs of a modest rebound, rather than dipping further, a rate cut in 2019 disappears from the forecast, while a rate hike remains most likely a 2020 event, if at all. Thus, as rates retrace to levels that prevailed pre-March FOMC that seems as good a spot to rest as any, with little in the numbers that portends a gathering of outsized economic and/or inflation momentum. Thus, with the 10yr at 2.59% and the 30yr at 2.99% if you have been waiting on a back-up to put money to work these levels are attractive.
Big numbers are due tomorrow in the form of March Retail Sales and the trading around the report will happen quickly as the fixed income market has an early close at 2pm EDT. In actuality, because of the early close, and subsequent Good Friday holiday, the trading off the retail sales numbers will likely be quick with most of the activity occurring before noon.
So what to make of the numbers so far this week as it pertains to economic activity? While first quarter GDP estimates are centered around 1.6%, if that comes to pass it will be the lowest quarterly result in three years when first quarter 2016 printed a 1.5%. That year saw second quarter GDP bounce to 2.3% and expectations are for second quarter 2019 to bounce as well but with a little more gusto to 2.6%.
While a somewhat disappointing first quarter GDP is expected, some March results aren’t exactly pointing to a solid second quarter rebound. Tuesday’s Industrial Production report was somewhat disappointing missing most pre-release forecasts as auto parts and car manufacturing were well off expectations. That lead to a decline in overall industrial production of –0.1% when growth of 0.2% was expected. In addition, February was revised down to 0.1% from 0.2%. Factoring out the volatile utility sector, manufacturing was unchanged in March versus 0.1% expected and –0.3% in February. Capacity utilization slipped as well from 79.0% to 78.8%, its lowest level since July and the fourth straight monthly drop.
The inventory overhang that developed in the second half of last year obviously continues to be a drag on new production as stocks of inventory continue to be worked off. The slow runoff speaks to tepid consumer and business demand and that could bleed into the second quarter dimming some of the expected rebound. While the overhang will eventually diminish and allow factory output to lift, that might be a late second quarter story instead of the hoped-for springtime revival.
That being said, the declines noted here are modest and not of the foreboding, recession-level drops. It does indicate, however, that the bounce may be more modest than expected with yearly 2019 forecasts perhaps facing downward adjustments. At the March FOMC meeting the Fed penciled in a 2.1% 2019 GDP rate while the Bloomberg consensus is still holding at 2.4%. Those estimates compare to the 2.9% logged in 2018. Thus, diminished GDP expectations are a big reason the Fed paused after December and also a big reason that yield back-ups are likely to be limited.
The retail sales numbers tomorrow will give us a look at the consumers spending patterns for March and a strong indictor of the momentum heading into the second quarter. Results are expected to show a solid rebound in consumer spending in March versus the disappointing February results with the numbers getting an extra boost from gas price increases that will be reflected in the unadjusted results. But even accounting for the expected pop due to increased prices at the gas pump, sales ex-autos and gas are forecast to be up 0.4% compared to a decline of –0.4% in February.
In the meantime, this week’s Fed speak shows a continued patient approach to any change in policy. Chicago Fed President Charles Evan (2019 FOMC voter) noted on CNBC, “while economic data has strengthened a little bit in recent weeks I can see the funds rate being flat and unchanged into the fall of 2020.” Meanwhile, Boston Fed President Eric Rosengren (2019 voter), noted “Despite some deceleration from last year, the pace of growth in economic activity will be enough to bring further reductions in the unemployment rate in the near term, so a recession is not my modal forecasts.” He added, perhaps tellingly that, “the 2% inflation goal has operated more as a ceiling than a target.”
We seem to be ending up with economic releases that are more middling in nature and without the hints of a more durable rebound that might have been expected given ongoing gains in the labor market and the pick-up in wage growth. Until we see a material acceleration in spending and/or inflation pressures the Fed is likely very comfortable continuing to sit on its hands as the nine prior rate hikes continue to work through the economy. That paints a picture of a fairly range-bound rate market as the short-end remains tethered to the Fed’s patient pause, and the long-end stays docile, reflecting the modest growth and inflation expectations.
Yields Reverse March FOMC Rate Dip
Treasury prices rallied strongly in the wake of the uber-dovish March 20th FOMC meeting with yields on the 10yr Treasury dropping from 2.61% before the meeting to 2.37% on March 27th as investors perhaps took the Fed’s overtly dovish tone as knowing something about the economy that wasn’t yet general knowledge. Since then, while most economic releases have posted modest rebounds, they haven’t signaled a deeper stall either and that has yields moving back towards the level that prevailed prior to the FOMC meeting. Given the modest economic rebound, and still docile inflation readings, the current bounce in yields may represent a decent entry point for those looking to put some funds to work.
Agency Indications — FNMA / FHLMC Callable Rates
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