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Week of April 15th, 2024

Capital markets weekly digest

Highlights and key takeaways:

Sticky inflation: The Consumer Price Index (CPI) topped expectations for the third straight reading, reverberating markets and forcing another reassessment of the Federal Reserve's rate cut timeline.

Treasury yields see repricing: The effects of March CPI launched Treasury yields to YTD highs last week and further justified the Fed's cautious approach in adjusting interest rates in the near term.

Agency CMBS investors parched with limited supply: Given a shortage of new issuance Agency CMBS amid a run-up in Treasury yields, investors snatched up standard structured deals keeping spreads stable-to-tighter week over week.

Market Insights:

Inflation reports indicate sustained pressures: U.S. pricing pressures continue to leave the Fed in a conundrum as March consumer inflation disappointed on all fronts to the upside. The headline Consumer Price Index (CPI) showed that inflation picked up on an annual basis to 3.5% (3.4% expected) with the monthly pace remaining throttled at 0.4%. Stripping out the volatile food and energy sectors from CPI revealed a similar story, with Core CPI’s disinflationary progress stalling at 3.8% (3.7% expected) while the monthly pace remains elevated at 0.4% (0.3% expected). This marks the fourth straight month of upward surprises in core inflation, which has prompted investors to reconsider the timing of the first rate cut. The March 20 FOMC Meeting Minutes mentioned that nearly all Fed policymakers felt it was appropriate to loosen their policy stance this year as inflation and employment risks are coming into better balance. However, the Fed acknowledged that they expected the road to 2% inflation to be windy. They feel that confidence in data needs to build and noted that recent data has not contributed towards disinflation sustainably. Wholesale inflation for March delivered more neutral results following CPI as the headline Producer Pricing Index (PPI) rose to only 2.1% (2.2% expected) with the monthly rate dropping to 0.2% (0.3% expected). While the wholesale inflation data temporarily relieved tension among market pundits, markets quickly refocused on consumer inflation’s stubbornness. Weekly Unemployment benefits delivered in line with expectations, leaving the four-week moving average of initial jobless claims unchanged at 214,250.

June rate cut odds cling by a thread: Treasury yields surged to fresh year-to-date highs last week on the hotter-than-expected March CPI print. The 10-yr Treasury yield rose to a YTD high of 4.59%. Investors have now taken the June rate cut bets off the table as expectations of the first rate cut commencing in June has dropped to 18% as opposed to 51% a week ago, according to the CME FedWatch Tool at the time of writing. The results of CPI set a somber tone as markets crawled back to the drawing board to reevaluate the timing of the first rate cut. Positioning both pre and post CPI release saw weak investor demand for last week’s Treasury auctions of $58 billion 3-year U.S. Treasury notes, $30 billion 10- year notes, and $22 billion 30-year bonds. This further pressured Treasury yields throughout the week.

Investors remain starved for new issuance offerings: The Agency CMBS market experienced a slowdown in the new issuance of Fannie Mae DUS securities. There was a measly $337 million in new issuance DUS volume this past week. The spike in Treasury yields pushed investors to temporarily sideline themselves as they reevaluated their risk tolerance. However, there's a silver lining. More standard structured deals, particularly larger structures with full prepayment terms, continued to attract investor interest. This ongoing demand in these structures helped tighten spreads by 1-2 basis points over the week. The lack of supply has investors also evaluating appetite further in less liquid, atypical structures (short prepayment, loan sizes under $15 million, supplementals, and more), helping to alleviate some of the recent concessions experienced for said structures. Fannie Mae priced their $509 million GeMS deal with the $357 million A2 class tranche (9.45-year average life) receiving very favorable investor interest. Freddie Mac priced approximately $500 million in Participation Certificates last week. Although new issue volumes have decreased, the Secondary buy/sell activity in the agency space remains active as investors reposition their balance sheets. ACMBS traders report strong investor demand for both new issues and secondary products, especially at current higher yield/return levels. Ginnie Mae traders have noted a slight increase in new issue rate locks, indicating continued interest from end investors.

Economic Events (Week of 04.15.2024 - 04.19.2024):

This will be quieter week from an economic data front. Bank earnings season for Q1 2024 started last Friday with J.P. Morgan reporting higher expenses and net interest income. The performance of the banks will provide markets with additional color on how elevated interest rates may be impacting their lending capacity. On the consumer front, Retail sales had previously seen two months of underperformance. However, Monday’s data release showed consumers remain resilient and spending fervently with March Retail Sales rising to 0.70%, along with upward revisions to the previous month’s print. Consistently strong consumer demand props up spending that may drive pricing pressures further. Wednesday will bring the release for The Federal Reserve's Beige Book. This provides a detailed look at economic activity, including employment, manufacturing, real estate, and other areas, across each of the twelve Federal Reserve districts. Lastly, geopolitical tension recently with Iran and Israel may result in elevated oil prices which could bleed into further pricing pressures.

Economic Calendar:

04/15: Monday:

o Mar. Retail Sales Advance MoM (Est. 0.40%, Act. 0.70%, Prev. 0.60%, Rev. 0.90%)

04/16: Tuesday:

o Mar. Housing Starts (Est. 1484K, Prev. 1521K)

04/17: Wednesday:

o Federal Reserve Release Beige Book

04/18: Thursday:

o Initial Jobless Claims for the week of April 13th(Est. 215K, Prev. 211K)

o Continuing Claims for the week of April 6th(Est. 1818K, Prev. 1817K)

o Leading Index (Est. -0.10%, Prev. 0.10%)

o Mar. Existing Home Sales (Est. -4.10%, Prev. 9.50%)

Monthly Core Consumer Price Index (CPI) prints saw a third straight month at 0.4%, the hottest three month string since early 2023.

Stubborn inflation pressures led to further volatility in Treasury yields with the benchmark 10-Yr Treasury seeing its third largest weekly trading range last week and hitting a new YTD high of approximately 4.59%.

Week in Review

Indicative rates

Market rate

Conventional fixed rate Fannie Mae and Freddie Mac, life company, and CMBS rates and spreads

Multifamily affordable housing

Agency preservation, taxable and tax-exempt bonds, and BWE Direct Bond Placement rates and spreads

Capital markets team

Jim Drizos
Sr. Managing Director of Capital Markets 
Mitch Ross.jpg
Mitch Ross
Vice President
Capital Markets Trader

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