Fed Vice Chair Clarida’s Comments Send Rates Higher

Equities hit all-time highs once again as swap rates and Treasury yields bounce back. The S&P 500 eked out a 0.1% gain today, completing the longest streak of all-time highs since 1997- markets taking solace from continued dovish central bank policy and strong corporate earnings. Swap rates and Treasury yields bounced back after Friday’s paradoxical rally, perhaps egged on by Fed Vice-Chair Richard Clarida’s public comments in which he said that inflation risks are “to the upside” and that the Fed may need to raise rates before the end of 2022. The 10-year Treasury yield closed 4 bps higher to 1.49% while 5-year yields climbed 6 bps to 1.12%.

Commercial real estate lending remains strong but banks continue to deploy excess liquidity into securities. Large and small U.S. banks continue to see momentum in CRE lending, growing at a QTD annualized rate of 3.53% and 6.10%, respectively. However, loan growth continues to be outstripped by deposit increases, which has pushed banks to deploy their excess liquidity into securities. Year-to-date, banks have increased their securities holdings by 19.0%, while growing loan by a paltry 1.70%.

Inflation outlook hits record high in Fed consumer survey. U.S. consumer inflation expectations hit a new record high in October with the consumers expecting inflation to rise to 5.7% over the next twelve months. Today, Fed Vice Chair Richard Clarida commented that current realized inflation has been “much more than a moderate overshoot” of the Fed’s 2.0% target and he would consider it a policy error if the trend continued through 2022. Tomorrow, the producer price index will be released, with the consumer price index released on Wednesday.