Leader Month in Review
A sell-off in rates in reaction to the strong February jobs report was short lived and Treasury yields fell across the curve in March. The 5-year part of the Treasury curve has been the lynchpin in terms of the market's assessment of the Fed's first interest rate hike, falling 20 bps during the month as investors have pushed out the consensus lift-off date. Investment Grade Credit and MBS spreads are marginally higher for the month, while High Yield spread widening caused the sector to under perform (see performance table.) However, year-to-date, Investment Grade and High Yield Credit have been the outperforming sectors.
In the Fed's latest post-FOMC meeting statement they removed the "patient" language, opening the possibility for a June increase of the Federal Funds Rate. At the same time, they took down their forward expectation for the Fed Funds Rate implying that the pace of interest rate hikes would be slower than previous cycles (see Fed "dots" , chart 1.) So while Fed officials have indicated a June interest rate hike is on the table, recent data has pushed out consensus to September.
The slowdown in the manufacturing sector due to harsh winter weather and L.A.'s port shutdown was readily apparent the weaker March ISM Manufacturing PMI. Although an uptick in personal income and wage growth were encouraging for the consumer (see chart 2), it did not translate into spending as retail sales excluding autos were flat. These factors have contributed to the decline in the Atlanta Fed's real-time estimate of Q1 GDP, now standing at 0.1%. Once these factors abate, we think the economy will revert to trend and we will see a rebound in Q2.
While the March Non-Farm Payrolls report clearly disappointed at 126,000 we estimate that the economy needs to add roughly 130,000 jobs per month to account for population growth. The Fed will most likely look at this report as an outlier, while an uptick in wage growth and inflation, if sustained, will be far more important for determining monetary policy.
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