Markets Are Forced To Reprice Yet Again

Financial markets have had a difficult time discounting the path of the U.S. economy and Fed policy during the past one to two years. Perhaps a bit of wishful thinking, practitioners have greatly underestimated the resiliency of both growth and inflation and overestimated the effect of higher interest rates in suppressing each.

April included yet another repricing for bonds to be more aligned with the “higher for longer” scenario following more upside data surprises and hawkish Fed rhetoric. It began with the March jobs report on April 5, which showed much higher job growth than expected (303,000+) and a slight downtick in the unemployment rate to 3.8%. The next week, core CPI exceeded expectations for March at 0.4% month-over-month; the year-over-year metric held steady at 3.8%.

“The recent data have clearly not given us greater confidence and instead indicate that it is likely to take longer than expected to achieve that confidence,” Jerome Powell, chair of the Federal Reserve, said during a moderated Q&A session on April 16.

Later in the month, inflation data within the first quarter GDP report was hotter than expected, sparking yet another sell-off in both Treasuries and equities.

The 5-Year Treasury yield rose 50 basis points in April, the biggest move across the yield curve, and the S&P 500 ended the month with a -4.08% return, the worst month since last September. The performance of both asset classes corresponded with a repricing of market expectations for forward short-term rates. Futures were priced for 158 basis points of rate cuts in 2024 to begin the year, which permeated across the entire yield curve. At the end of April, futures were priced for just 28 basis points of rate cuts in 2024.

Pricing in Overnight Indexed Swaps (OIS), the floating rate of which is the effective funds rate, is similar to fed funds futures, and the long-term/terminal OIS rate was close to 4% at the end of April, roughly 100 basis points above year-end 2023 pricing. This implied OIS terminal rate is also approximately 150 basis points above the FOMC median forecast for the long-run fed funds rate from the March 20 meeting.

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Jason Haley joined ALM First in 2008 and is the firm’s chief investment officer. He heads ALM First’s Investment Management Group (IMG), which is responsible for leading the investment process and investment theme development. Haley also oversees all capital markets activities, including portfolio management, trading, market research and commentary, and execution of hedging and funding strategies for the firm’s depository clients. He holds an MBA with a concentration in finance and a BBA with a concentration in marketing, both from The University of Mississippi.

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