Inflation Data and FOMC Minutes Sends Short-Term Rates Higher

Short-term rates increased on the day as traders prepare for a more aggressive Fed With the Thanksgiving holiday upon us, there was a bevy of economic data for the markets to chew on. First, U.S. initial jobless claims came in well below expectations to hit a five-decade low of 199,000 as the labor market continues to show improvement. Rates initially increased across the curve on the report. However, inflationary data and the release of the November FOMC minutes eventually flattened the curve as long-term rates pulled back and short-term rates rose with traders starting to price in earlier rate hikes. The spread between the 2-year and 10-year U.S. Treasury yield would contract 5 bps on the day and close under 100 bps for the first time since early August 2021.

Consumer spending beat expectations as inflation hits a three-decade high. U.S. consumers’ appetite for spending showed no signs of abating in October with spending increasing 1.3% month-over-month, well above analyst expectations of 1.0%. The personal consumption expenditure (PCE) index, the Fed’s primary gauge for inflation, increased 0.6% in October from the prior month, and 5.0% year-over-year, the highest increase since 1990. Core PCE, which excludes food and energy prices, hit a 30-year high increasing 4.1% year-over-year.

Fed members focus on flexibility in next policy steps. This afternoon, the November Fed FOMC minutes were released and showed many participants are willing to quicken the pace of asset purchases and increase rates sooner if inflationary pressures continue to run higher than expected. After the minutes were released the premium for a potential March rate hike increased with 30% of a 25 bp hike now priced into the Fed’s March policy meeting. The market will get a clearer picture on rate hike projections when the Fed releases its dot plot after its December policy meeting.