Curve Flattens with Fed Taper on the Horizon

Curve flattens dramatically once again on CPI data and FOMC minutes. Short-term swap rates and Treasury yields rose sharply while the long-end of the curve fell ~4 basis points, mimicking yesterday’s price action as the market balanced multiyear highs in inflation with the Fed’s expected taper next month. Bank earnings season also got underway with JPMorgan and First Republic reporting third quarter results- JPMorgan called out “robust origination pipelines” in CRE lending which could produce some net loan growth in the quarters ahead. Bank stocks would ultimately follow the 10-year yield lower on the day, though US equities as a whole ended the session higher – the S&P 500 climbing 0.30%.

September CPI hit a 13-year high at 5.4%. Inflationary pressures are proving to be more sticky than anticipated as price increases extended beyond food and energy prices in the month of September. Rising rent and lease costs contributed meaningfully to the index, with shelter costs increasing 0.4% month-over-month. Core CPI, which excludes energy and food prices, was in-line with analyst expectations with a year-over-year increase of 4.0%.

FOMC minutes reveal Fed’s plan to taper $120 billion buying program could happen as early as November. The minutes from last month’s meeting also gave detail on the rate of the tapering. According to the minutes, the Fed would reduce their purchases by $10 billion of U.S. Treasuries and $5 billion of mortgage-backed securities each month with the program winding down in its entirety by mid-2022. Some of the participants commented that contacts within their districts do not expect current supply chain disruptions to recede until sometime in 2022 or later, putting pressure on future inflation expectations.