Displaying items by tag: fed

We are nearing the end of one of the most aggressive periods of monetary tightening in history. Since March 2022, the Federal Reserve has hiked 11 times, sending the benchmark rate above 5%. At the latest FOMC meeting, Chair Powell left room open for more hikes if necessary, but the overall message was that inflation was moving closer to desired levels, while the economy remained resilient. 

Most market participants are now focused on the Fed pivoting and cutting rates sometime in 2024. Therefore, it wouldn’t be prudent to hold off on investing in an annuity or other sort of fixed interest investments in the hopes of securing higher rates. In fact, we are starting to see cuts on some annuities for the first time in years, following the recent decline in longer-term yields

For most of the year, ‘higher for longer’ has been the prevailing narrative. Yet, there are many indications that we are in the final innings of the hiking cycle such as a cooling labor market and moderation in inflation. Additionally, public comments from Fed officials have indicated the need to cut rates if inflation does moderate to keep real rates from climbing even further. 

Currently, annuities are at their highest payout rates in decades. Given the likelihood that we are in the midst of a Fed pivot, prospective buyers of annuities should take advantage of these attractive rates before they start to drop. 

Finsum: Fixed annuities are quite attractive given the current level of rates. Yet, there are some signs that interest rates are going to turn lower which means that this is an opportune time to invest in an annuity.  

There was strength across the board in fixed income following an inflation report that continued last month’s cooling trend and a dovish FOMC meeting. The yield on the 10-Y was 27 basis points lower, while the yield on the 2-Y dropped by 36 basis points. 

The November CPI report showed a monthly gain of 0.1% for the headline figure which was in-line with expectations and a slight increase from last month’s unchanged print. Core CPI came in at 3.1% on an annual basis which was consistent with expectations. Overall, the report indicates that inflation continues to moderate and is getting closer to the Fed’s desired levels.

While fixed income rallied following the CPI, the rally accelerated following the dovish FOMC meeting and press conference. The Fed held rates steady but surprised markets as it now expects 3 rate cuts in 2024. It also downgraded its 2024 inflation forecast to 2.4% from 2.6%. 

In his press conference, Chair Powell affirmed progress on inflation and noted that the economy was slowing in recent months especially from Q3’s rapid pace. He added that high rates were negatively impacting business investment and the housing market. Markets jumped on his remark that further rate hikes were ‘not likely’ although possible if necessary. 

Finsum: Treasury yields were sharply lower following a soft CPI report and dovish FOMC meeting. Stocks and bonds were bought higher as the Fed is now forecasting 3 rate cuts in 2024. 

Treasury yields were higher following the November jobs report which showed a bigger than expected decline in the unemployment rate. The report suggests that the labor market remains tight which could prolong the Fed’s hiking cycle. However, the bulk of the gain in yields was given up in ensuing sessions as traders remain more focused on weakening inflation and softer economic growth.

According to the Labor Department, the US economy added 199,000 jobs in November which was just above consensus expectations of 190,000 jobs added and an improvement from an increase of 150,000 jobs in October. The unemployment rate dropped to 3.7% below consensus expectations of 3.9%. Some note that the report was helped by auto and entertainment workers returning to work after strikes. 

Some traders are looking for labor market weakness as the next impetus for the Fed to shift its policy. Clearly, this report dispelled notions that the economy is contracting and provides more ammunition for the ‘soft landing’ hypothesis. 

Wage growth also moderated to fall to 0.4% monthly and 4% on an annual basis. In terms of the economy, government and healthcare were the biggest sources of jobs growth, while the retail sector and transportation & warehousing shed the most jobs.

Finsum: Treasury yields were slightly higher following the November jobs report which came in stronger than expectations. 

Charles Schwab is forecasting positive returns for fixed income as the economy slows and inflation continues to fall. However, it expects volatility to linger given uncertainty about the Fed’s policy moves. 

Schwab notes that yields have been unusually volatile as the 10-year yield has ranged between 3.5% and 5% over the past 12 months. Yet, it believes that short and long-term yields have peaked for the cycle. 

It sees downward pressure for inflation given that supply issues have abated, while it sees the impact of tighter monetary policy continuing to materialize, also adding to downward pressure on inflation. Despite this bullish forecast for bonds, it doesn’t see a return to the pre-Covid era of low rates and quantitative easing (QE). 

In terms of economic growth, Schwab notes some risks as high real rates are impacting the economy as they create more incentives for consumers to save rather than spend. Two more  headwinds are tighter lending standards at banks and the Fed continuing to unwind its balance sheet. Another factor contributing to volatility is that the Fed could elect to keep rates higher as it wouldn’t want to squander gains made in the fight against inflation.

Finsum: Charles Schwab sees positive returns for fixed income in 2024 due to slower economic growth and falling inflation. However, it expects volatility to continue given uncertainty over the Fed.

Since the yield on the 10-year inched above 5% in October, we have seen a relentless rally in Treasuries. According to Bank of America, this rally is due to the increasing likelihood of an upcoming Fed rate cut and is just getting started. It eventually forecasts the 10-year yield falling another 200 basis points based on historical precedent of dramatic declines in yield during the interim period between the Fed’s final rate hike and first rate cut. 

There have been five hiking cycles since 1988. Each saw a major rally in Treasuries once the hikes were complete. The largest decline was 163 basis points, while the average decline was 107 basis points. The drop in yields tended to abate once the Fed began cutting rates. This cycle Bank of America sees the 10-year yield dropping to 2.25% by May 2024 which is when the first hikes are expected to take place. 

Such a decline in Treasury yields would have major implications for other asset classes as well. The researchers also warned that this prediction could be impacted by ‘lingering inflationary pressures. Interestingly, the bank’s strategists have a different outlook as they expect the 10-year period to end next year at 4.25%, which indicates minor change from current levels. 

Finsum: Bank of America shared historical research which shows that the 10-year yield tends to experience weakness during the interim between the Fed’s final hike and its first rate cut.