Moody’s downgraded the US…just 14 short years after S&P did so. If you bought a T10 in 2011 right after the US got downgraded, you probably remember all the missed interest payments by the federal government…what actually changed in the last three months? Is this a rating agency virtue signal?
Moody’s downgrading the US seems about as useful as my new kicks declaring they are vegan. This raises so many questions. Are my sneakers themselves vegan? Are they virtue signaling to vegans? Is there a red meat alternative that I could have ordered?
I guess I’m guilty of virtue signaling, too. Nothing says humblebrag like drawing attention to a sweet new pair of Skechers slip-ons…
Last Week This Morning
Interesting Interest Rates
Francois Trahan, President of the Macro Institute, highlighted how sentiment is worst among the top earners. This weighs on me heavily since we expect to sell our house in the next year as our youngest graduates high school.
Ironically, equities are actually above where they were on election day, but the path has been brutal.
Maybe the worst-case scenario is off the table…but now we have trust issues.
Maybe the extension of the tax cuts is the type of win the administration needs to begin healing the wounds…if they can pass it.
Maybe sentiment will recover before the labor market is impacted…but from BCA Research, if soft data doesn’t reverse course soon, the labor market will likely roll over.
That, coupled with the rising delinquencies in student loan payments, sets the stage for a pretty tough second half of the year.
And even if a lot goes our way, will we truly recover to pre-Liberation Day optimism with the lingering trust issues?
Rates
TD Securities rates team expect the temporary inflationary spike from tariffs to settle by September1. Until then, the Fed is stuck between a rock and a hard place. Even if they expect material weakness, they can’t cut in the face of rising inflation.
So for the next six months, the Fed is stuck riding out the inflationary wave, hoping the unemployment rate doesn’t surge. Like my Wachovia mentor used to tell us, “Hope is a terrible hedge.”
The good news is that the de-escalation with China likely means the Fed’s approach later this year will be about “normalization” rather than “support.” Same as the cuts last year – letting off the brakes, not pressing on the gas.
While I expect a lot of scary headlines in the coming months about inflation, the Fed has a decent amount of cushion to absorb a temporary burst of inflation this year.
Cap prices have climbed a bit in the last couple of weeks as the T2 moved back up to 4%, but we are still well off the highs.
A one year cap at today’s SOFR is just 12bps.
A two year is just 35bps.
The market has a 0% probability of a Fed hike at any point over the next two years. I think it’s close to 0%, but I’ve been wrong enough since the spring of ’22 to still have fresh wounds. Ensuring my floating rate never exceeds today’s level doesn’t seem like the worst hedge…especially if you believe hope is a terrible hedge.
The T10 is testing 4.5%. If we break through, 4.81% is the next major resistance level. I think it’s more likely that we remain range bound between 4.21% - 4.50%.
The T10, like all of us, is in a holding pattern.
The Week Ahead
Pretty quiet data week ahead, but around 500 Fed speeches.