Leader Month in Review
March 5th, 2015
Economic Data Releases:
February Market Action
If January can be categorized by falling rates, February was the reverse. The yield on the benchmark 10 year Treasury rose 32 bps during the month on the back of a strong January jobs report and stronger than expected inflation and consumer spending data.
It was firmly “RISK ON” as High Yield bonds were the only domestic sector to post a positive return for the month (see table to the right). Rising Treasury rates drove the negative returns for the Barclays U.S. Aggregate, of which 36% is Treasuries. Within high grade bonds, MBS were the relative outperformer, only declining 16 bps for the month. High Yield’s outperformance was driven by a dramatic spread tightening – with Energy spreads leading the way downward (see chart 1).
The January FOMC meeting minutes, judged by most market participants as dovish, helped push the consensus rate hike date out further (see chart 2). The market is currently putting the Fed “lift-off” date as a toss-up between September (grey line) and December (orange line). A June rate hike (blue line) only has an 18% probability, which we view as quite low given the strength of the labor market.
Also pushing the consensus “lift-off” date out further has been moderating Core inflation measures attributable to the drop in oil prices. While not directly included in the figures, oil prices has flowed through to other goods prices. Indeed, it is goods prices that have pushed core inflation down as goods inflation has dropped sharply (see chart 3, orange line), while service prices have remained robust (blue line).
A stabilization in goods prices – either from oil price stabilization throughput or a weaker dollar – should see inflation move higher. As such, we view a June rate hike as still firmly on the table given recent Fed governor speeches and a few higher inflation prints would seal the deal.