FOMC and Geopolitical Events The Focus This Week

Jun 11, 2018
Singapore

Investors Have Plenty to Contemplate this Week

This week will be dominated by the Wednesday FOMC rate decision with a 25bps rate hike a given at this point. But the week is also full of other market moving nuggets like the May CPI release tomorrow, retail sales on Thursday and Industrial Production on Friday. If the purely economic wasn’t enough we have the North Korean summit tomorrow and the after effects of the G-7 meetings over the weekend to keep the geopolitical risks front and center. Wait, that’s not all. The Treasury will be auctioning $68 billion in 3yr, 10yr and 30yr securities between now and tomorrow afternoon. The confluence of the economic-related data and new supply is more than likely to pressure yields higher while the geopolitical risks always have the potential to spur a flight-to-safety bid in Treasuries.


Treasuries

Treasuries

Short-Term Rates

Short-term Rates

Economic Calendar

Economic Calendar

 


Top Events of the Week Top 5 Events for the Week

JUNE 11 – JUNE 15,  2018

1.  FOMC Rate Decision — Wednesday
2.  Geopolitical Risks — All Week
3.  May CPI — Tuesday
4.  May Advance Retail Sales — Thursday
5.  Treasury Auctions — Mon/Tues.

 

 

1.  FOMC Rate Decision — Wednesday

The FOMC’s two-day meeting will conclude on Wednesday afternoon with an expected 25bps rate hike to the fed funds rate, but the real drama will be in the updated projection for future fed funds rate levels. The three-hikes in 2018 projection from March has real potential to rise at Wednesday’s meeting and the betting here is the median will shift to a four-hike 2018. That shift, and an expected positive tone about domestic economic growth, is likely to pressure short-end yields higher as the market prices in higher odds of a fourth rate hike.

 

2.  Geopolitical Risks — All Week

The tensions on display at the G-7 meeting this past weekend will give way to tomorrow’s North Korean summit in Singapore and the continued geopolitical maneuvering is likely to maintain a bid in Treasuries as the mercurial Trump administration keeps markets and the globe on edge over the latest developments emanating from the White House. While most of the other issues in the Top 5 List this week are apt to pressure yields higher, the geopolitical risks are such that it could spur a flight-to-safety bid in Treasuries.

 

3.  May Inflation Readings — Tuesday

Tomorrow we get the May reading on consumer inflation in the form of the May CPI report.  Expectations are calling for the month to be up 0.2% matching the April gain. The core rate (ex-food and energy) is expected to increase 0.2% edging up from the prior month’s 0.1% gain.  On a year-over-year basis, CPI is forecast to move 3/10ths higher to 2.8% versus 2.5% in April while core CPI YoY is expected to inch up again to 2.2% from 2.1% the prior month.  While the core PCE is the Fed’s preferred inflation measure and remains under 2% at 1.8%, if core  CPI continues to stay above 2%, core PCE will eventually get there and the Fed will continue with plans to hike rates on a quarterly basis until further notice.

Core CPI

  

4.  May Retail Sales — Thursday

The May Retail Sales Report will provide additional evidence on whether the soft first quarter consumption numbers were an anomaly with an expected rebound in second quarter consumer spending. Overall sales are expected up 0.4% versus 0.2% in April, while sales ex-autos and gas are expected up 0.4% versus 0.3% the prior month.  More importantly, the control group –sales less autos, gas, and building materials– which is a direct input to GDP is expected to be up 0.4% versus April’s 0.5% gain. In summary, a solid report is expected that in most respects is equal to or better than April adding evidence that the consumer is indeed rebounding this quarter.

 

5.  Treasury Auctions — Monday/Tuesday

Treasury supply will be another story early in the week with an adjusted auction schedule of $32 billion 3yr Treasury notes and $22 billion 10yr notes on Monday, followed by a $14 billion 30yr bond offering on Tuesday. Each maturity is $1 billion larger than recent auctions as the Treasury Department continues to focus its heavier borrowing needs on the front end. We see little evidence to suggest this will be the auction series where supply hangover appears, but the risk remains present, especially when yields are off recent highs. The looming FOMC meeting mid-week, could temper demand as well which is another factor in why we expect yields to be under some pressure this week.

 

 

 


Technicals Investment Yield Ranges Over Last Year

 

US Treasuries

FHLB Agency Bullets

Mortgage Backed Securities 

Municipals

US Corporate - Financials

US Agency Swap Rates

 Source: Bloomberg

 

 

 


 

Tom Fitzgerald Signature

Thomas R. Fitzgerald

Director, Strategy & Research

Tfitzgerald@centerstatebank.com

 

 

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