Last week, the Gross Domestic Product (GDP) growth figures were released. These growth figures showed a slightly slower expansion than previously anticipated. Following this, the month-over-month core and headline personal consumption expenditures (PCE) numbers were revealed, which slightly missed expectations. Despite the somewhat unexpected numbers, the market’s anticipation of an additional interest rate hike in 2023 remained at around 50%.
Also during the past week, two-year swaps dropped by 4 basis points, while ten-year swaps increased by 12 basis points, resulting in a steepening of about 16 basis points. Upcoming releases including Institute for Supply Management (ISM) manufacturing data, JOLTS (Job Openings and Labor Turnover Survey) figures, and non-farm payroll and unemployment numbers should indicate the chances of a rate hike later this year. Additionally, these numbers should help form a consensus on whether rate hikes will remain elevated for the foreseeable future.
One factor that will have an impact on rate hikes will be the potential government shutdown and the budget agreement that was recently reached. Some professionals believe this is temporary and that a shutdown could manifest later this year. Concerns around a short-term fix and its potential to erode market confidence are principally at play. The ever-increasing issuance of treasury bonds, their potential effect on rates, and the possibility of a US sovereign debt rating downgrade play a major role in those fears.
In the swaps market, things have been quiet as of late. There is an evident struggle in the market to adjust to a 5% SOFR rate. The curve diversion and difference between short- and long-term rates are responsible for much of this stagnation. The real estate market continues to face challenges, namely around the limitations banks are now placing on financing, leading to not just a lack of transactions but also a deficiency in the debt market overall. This relates as well to the CMBS market, as challenges persist with current rate scenarios and the expensive nature of lending at the present time.
Overall sentiment is one of caution as many uncertainties and challenges still exist. Ideally, government shutdown avoidance coupled with positive economic data, will lead to a more positive overall outlook and sense that rate hikes will subside.
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