The FOMC delivered a 25 basis point hike to fed funds yesterday in a move that had transitioned to base case for market watchers over the previous few sessions. The policy statement contained several items of note, not the least of which was language stating that some additional policy firming “may” by appropriate—a subtle but significant change from “will” be appropriate. With that stroke of pen, the Fed may have signaled that yesterday’s hike was the last one in this cycle. At the very least, the door was definitively opened for that possibility. While acknowledging recent market disruptions and the uncertainty associated with the failures of SVB and Signature Bank, the Fed asserted that “[t]he U.S. banking system is sound and resilient”. The dot plot (the summary of rate projections for each individual FOMC member) remained unchanged for 2023, but did increase in 2024 which reaffirms the commitment for maintaining the terminal rate higher for longer than the market is currently pricing in.
While the policy statement struck a confident tone vis a vis the banking sector, Powell seemed much less sanguine in his presser. Taking this cue, the flight to quality trade that defined the last week and a half was once again revived with equities cratering along with yields. The 10yr closed the session lower by 17 basis points while yields at the shorter end of the curve fell even more dramatically. Mortgage-backed securities had a decent day with current coupons improving 80 to 85 basis points in price, contributing to a 30 basis point decline in the average 30yr mortgage rate.
Data dependence is an alliteration that will receive plenty of airtime over the coming weeks as the market attempts to divine whether it has experienced the final rate hike of this cycle. Not only will upcoming inflation surveys be impactful, but so too will headlines related to the relative soundness of the banking sector.
Overnight, markets reversed a bit of yesterday’s flight to quality flows and yields are currently framed higher by a few basis points at the longer end of the curve. Jobless claims and new home sales represent the only items of note on today’s economic calendar, and there is a $15bn 10yr Treasury auction later this afternoon. The latter could present some headwinds for the morning session. Have a great day!
H
