Weekend Market Recap 5/6/23

Happy Saturday!!

The first week of any month is known for its high concentration of influential economic data that can significantly impact the bond market and interest rates. This past first week of May proved to be no exception, as scheduled economic reports coincided with unexpected developments in the banking sector. In this recap, we will delve into the key events and their effects on bond yields, interest rates, and mortgage rates.

The week began with unscheduled drama in the banking sector, particularly the orderly failure of First Republic Bank and rumors of impending bank failures. These events, coupled with a run on various bank stocks, led to temporary halts in trading known as "circuit breakers." The uncertainty and instability in the banking sector had a notable impact on bond yields and interest rates.

The lower job openings on Tuesday morning, combined with the banking sector turmoil, caused bond yields to decrease, resulting in lower interest rates. The effect was more pronounced in 2-year Treasury yields, which closely align with the Federal Funds Rate, compared to the 10-year Treasuries typically monitored.

Despite a widely anticipated 0.25% hike in the Fed Funds Rate announced by the Federal Reserve later in the week, interest rates continued to trend lower throughout the week. This volatility in bond yields was evident, with 10-year yields fluctuating within a range of approximately 0.25% and 2-year yields experiencing a range closer to 0.50%.

Mortgage rates have not necessarily mirrored the movements in Treasuries but have exhibited a similar sideways trend. Rates have been consolidating within a narrower pattern centered around a conventional 30-year fixed rate of 6.5%. This consolidation pattern suggests market indecision as it seeks to gauge the direction of inflation and determine if it necessitates additional rate hikes by the Federal Reserve.

Looking ahead to the following week, the focal point of potential volatility shifts to Wednesday morning when the latest monthly release of the Consumer Price Index (CPI) will be unveiled. Among the various inflation reports, CPI holds the most significant influence in the market. The market is actively monitoring inflation data to discern whether it remains in check and declining or if persistent inflation will require further rate hikes from the Federal Reserve.

Within the CPI data, the monthly "core" reading, which excludes volatile food and energy prices, is of utmost importance. At its highest level, the core reading reached 0.8%, remaining above the target range even though it has slightly declined. Achieving the 2% target would necessitate 12 months of 0.167% core inflation. Currently, the year-over-year chart does not provide a convincing indication of sustained progress toward this target.

In conclusion, the first week of the month proved to be a highly eventful period in the bond market, with economic data, banking sector drama, and the Federal Reserve's interest rate decision influencing bond yields and interest rates. The consolidation pattern observed in mortgage rates reflects market indecision regarding inflation and potential rate hikes. Looking forward, the release of the Consumer Price Index (CPI) will be a key market-moving event, as it holds the potential to shape the future trajectory of interest rates. The market's interpretation of core CPI data will play a crucial role in determining if inflation is under control or if further rate adjustments are necessary.