Next week could be big for rates

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Published Date 2/23/2018

As you know, we have been expecting some rebound in rates this week. Today the note slightly broke its two-month-long trading channel.

Next week is loaded with key data, this week hardly any other than the soft Jan existing home sales on Wednesday. Monday, Jan new home sales; Jan Chicago Fed National Activity Index. Tuesday, Jan durable goods orders, preliminary Jan inventory levels for retail and wholesale inventories, Feb consumer confidence index from The Conference Board, Dec Case/Shiller et al home price index, Jan US trade deficit. Wednesday, final Q4 GDP data, Feb Chicago purchasing mgrs. index, Jan pending home sales. Thursday, Jan personal income and spending (the Fed’s inflation favorite (PCE), Feb ISM manufacturing index, Dec construction spending. Friday U. of Michigan final Feb consumer sentiment index. The calendar doesn’t indicate Feb employment on Friday as is normal unless the 1st falls on Friday.

Those are the key economic releases, but there is much more next week. Tuesday Jerome Powell will testify to the House Financial Services Committee, the required semi-annual report to Congress on Monetary policy. Wednesday Powell moves to the Senate Banking Committee for more testimony. Markets are generally convinced the Fed will increase rates three times this year with the first increase at the March meeting in three weeks. Between the economic data and Powell’s testimony, both stocks and bonds have a lot to digest next week.

As outlined above we still feel rates are trending slightly higher. Fundamentally the overwhelming belief is wages will increase spending, which will increase and inflation will edge higher. The outlook has been debated since the President Trump's tax cuts. The Fed believes the economy will expand this year and frets that it does not want to fall behind any inflation increases. There are times that caution has to prevail; rather let a small opportunity go by rather than being whip-sawed in choppy interday swings. Going into the 4:00 PM ET close the 10 yield bumped up from 2.86% to 2.88%.

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