On again, off again –that pretty much sums up the Street last week. Here were a few factors driving the risk pendulum:
- The Federal Reserve released its March meeting minutes, which indicated that the Fed will likely start shrinking its balance sheet this year. While inflation currently remains below the Fed’s 2% target rate, a few members of the FOMC felt that the economy was poised to meet its inflation goal later this year, which could warrant removing accommodative policies at a faster pace. Rates will continue to feel upward pressure as positive economic factors drive growth including potential fiscal stimulus expected to go into effect in 2018.
- Shrinking the balance sheet may prompt a “little pause” in rate hikes by the Fed, according to William Dudley, CEO of the Reserve Bank of New York. Dudley indicated that if the Fed starts shrinking its balance sheet, it might want to see the effects of such moves before raising short-term rates. Following the press conference, Mr. Dudley clarified his earlier statement by saying “I think some people misconstrued what I said last week. I said the words “little pause.” A pause is pretty short already, and I think a little pause is even shorter than that”. Investors interpreted the follow-up comments as being hawkish which drove 10-year rates higher by 4bps.
- Mixed economic data continued to drive uncertainty, with the weather impacting the March jobs report of 98k vs 180k expected; though the unemployment rate dropped from 4.7% to 4.5%.
- Geopolitical risks were at the forefront of creating market jitters as well. U.S. missile strikes in Syria followed by a truck attack in Sweden further fueled concerns as the markets moved towards a more risk-off position. Oil prices also rose on the back of the air strikes in Syria as investors bet on a disruption in supply. WTI crude closed the day at $52.24
- USD Swap rates ended last week’s trading session up:
2y swaps up 3.2bps to 1.612%
5y swaps up 5.25bps to 2.027%
10y swaps up 4.87bps to 2.354%
While the market was certainly kept on its toes last week, things may slow down as the Easter holiday and Passover approaches this week. Fed Chair Yellen will be speaking Monday afternoon at the University of Michigan Ford’s school of Public Policy. On the economic data front inflation, retail sales and consumer sentiment will be released towards the end of the week. Market practitioners best not get too comfortable ahead of the holiday.
