H2C INDUSTRY INSIGHTS: CAPITAL MARKETS
Interest Rates and Economy
Week of July 18, 2022
Interest Rates & Economy
Commentary – Interest Rates & Economy (1)
Interest Rate Update
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After stronger-than-expected inflation data, many now wonder if the Fed is going to consider a more aggressive action later this month à 100bps increase, rather than the prior expectation of a 75bps hike. Also, Fed funds futures put the likelihood of a 100bps hike on July 27 at 29%, up from 7.6% a week ago.
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Two-year yields rose 1.6bps to 3.13% this week. Ten-year U.S Treasury note settled at 2.90% down from a high of 3.61% right after the CPI report. The 30-year yield declined 17.4bps to 3.09% this week.
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The two-year yield finished 24 bps above the ten-year yield Wednesday, the largest gap in that direction since 2000. This gap represents the second time the curve has inverted since April, which is a potential leading indicator of a recession.
Economic & Financial Update
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Fed research published this week based on modeling of bond-market yields puts the chance of a recession next year at 35%. In addition, according to Atlanta Fed’s GDPNow model, the real GDP growth is expected to be -1.5% in the second quarter, which is a decrease from last week’s forecast of -1.2%.
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Even with growing fears of recession, the June job report showed U.S. labor market maintained its positive pace: a steady 3.6% unemployment rate and a headline gain of 372k jobs, stronger than the 275k consensus.
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U.S. CPI jumped 9.1% in June, above the 8.8% Dow Jones estimate à the largest increase since 1981.
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Gasoline prices have retreated, and domestic natural gas prices have tumbled since mid-June. With the combination of the two, July’s inflation is likely to moderate, but underlying inflation pressures remain intense.
Federal Open Market Committee (FOMC)’s
Assessment of the Appropriate Federal
Funds Target Rate, June 2022 (1)
Wall Street Rate Forecast
1) Source: Federal Reserve, Summary of Economic projections, June 15, 2022; Bloomberg LP; CME FedWatch Tool
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H2C Capital Markets Team