Economic News
There is a bit of a risk-on trade this morning coming on the news that Russia and Ukraine have agreed to a cease-fire deal, but subsequent stories are casting
doubt on exactly what has been agreed to so markets are pulling back some from the initial optimism over the headline. The first report mentioned a permanent cease-fire agreement while a subsequent report had it as a temporary cease-fire and a third has it as a cease-fire regime being agreed to, whatever that
means. As to what to make of it all, we recall a recent former U.S. ambassador to Russia saying something to the effect that when dealing with Putin always
assume he will select the option that will disappoint you the most and that is the one he usually goes with. That advise would have certainly put one in good
stead during this crisis, so taking that advise we say don’t read too much into the cease-fire news as it’s likely to be just another in a string of disappointing
developments.
Meanwhile, Treasuries continue the back-up from yesterday with the 10-year note adding a couple more basis points of yield due primarily to the aforementioned news. The 10-year is yielding 2.45% which represents the highest yield since mid-August. With employment numbers set to hit the wires later this
week the market could also be getting ready for what could be a strong report adding another reason for the selling. That being said, with rate differentials
against other safe haven sovereigns (read Germany) still at extremes, and with the U.S. dollar still rallying against most major currencies it’s going to be a
challenge for Treasuries to incur a meaningful yield back-up. Thus, we view any move to higher yields as more of a buying opportunity than a reversal of trend
to higher rates.
The FOMC next meets September 16 and 17. One certain outcome of that meeting will be another $10 billion cut from the Fed's QE3 program with a glide
path set for an October wrap of the asset purchase program. The subsequent press conference provides Yellen the opportunity to communicate more clearly
the technical elements of the normalization process if the Fed feels sufficiently confident in the broad outlines of their plan. Less certain is a change in the
forward guidance to reflect the dissent of Philadelphia Federal Reserve Charles Plosser. If the “considerable time after the asset purchase program ends” is
left in the statement this time, expect Plosser’s dissent to be joined by Dallas Fed President Richard Fisher. Given the somewhat hawkish tone of the July
minutes, subsequent positive economic releases, and Yellen’s moderate comments at Jackson Hole, it’s likely, however, that the phrase will be omitted or
altered in some fashion.
The Friday jobs report will go a long way in deciding the fate of the phrase in the statement and expectations for lift-off of the fed funds rate. If a strong report
is released with a beat of the headline number, and some of the secondary indicators like the U-6 unemployment rate, long-term unemployed, and part-time
employed show meaningful drops then Yellen may be inclined to pull the phrase and set us up for more discussions and timing of policy normalization.
U.S. Treasury Yield Curve
3.00%
2.50%
Current
2.00%
Last Month
Last Year
1.66%
1.71%
1.50%
1.00%
0.50%
0.00%
3 mo
1.39%
0.48%
0.53%
0.08%
0.06%
0.05%
0.06%
0.03%
0.02%
2.61%
2.52%
2.44%
0.32%
6 mo
2 yr
5 yr
10 yr
Agency Indications — FNMA / FHLMC Callable Rates
Maturity (yrs)
2 Year
3 Year
4 Year
5 Year
10 Year
15 Year
0.25
0.75
1.25
1.95
2.10
3.20
3.65
0.50
0.65
1.15
1.90
1.95
2.97
3.44
1.00
0.60
1.14
1.60
1.95
3.05
3.41
2.00
-
1.11
1.56
1.90
2.97
3.38
3.00
-
-
-
1.84
2.90
3.32
4.00
-
-
-
-
2.83
3.28
5.00
-
-
-
-
2.77
3.22
10.00
-
-
-
-
-
NA