Fixed Income Market Update

April 14, 2023

This week, the Consumer Price Index and the Producer Price Index were released. The results were not bad. Unfortunately, they were not great. They showed there is still more work for the Fed to do before they can think about a Terminal Rate. 

The CPI ex-Food and Energy report showed some sectors with easing inflation pressures, but housing increased 8.2% over last year which accounted for 60% of the total increase in all items less food and energy. Housing is a lagging part of the index (Remember late last year we mentioned that it was coming). Other so-called “Super Core” components also remained too high for the Fed’s comfort. 

The PPI report showed a greater decline than expected, but buried in the report was the Primary Services component, where the BLS tries to estimate the profit margin for retail business. This indicator has a good relationship with profit margins and corporate markups. This figure showed margins in many goods are still well above pandemic levels. Economists are concerned these sticky profit margins are fueling the much-feared profit-wage spiral.

What’s all of this add up to? A speech from a Fed Governor:

“Because financial conditions have not significantly tightened, the labor market continues to be strong and quite tight, and inflation is far above target, so monetary policy needs to be tightened further,” Federal Reserve Governor Christopher Waller said Friday in a speech in San Antonio, Texas. “How much further will depend on incoming data on inflation, the real economy, and the extent of tightening credit conditions.”

The CME Fed Watch Tool below indicates futures are still pointing to one more 25 basis point increase, but the time frame for potential rate cuts is extending, showing the Fed holding rates high for longer (Just not higher for longer).

We would encourage investors to carefully look at the yield curve and avoid the lure of high short-term yields. Close inspection of that same CME Fed Watch Tool shows futures forecasting Overnight Fed Funds may decline to 3.75% by June 2024 and potentially going lower after that. Extending some of your portfolio into longer maturities can lock in what seem like low yields today, but could be great yields 1 ½ years from now.

-Peter Baden, CFA
Chief Investment Officer

Click on the above links for more information on important investment and economic concepts.

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Next FOMC Decision
May 3, 2023

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The Week Ahead

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CME Fed Watch Tool

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Fixed Income Rates

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