Daily Market Color

UK Inflation Data Spurs Rates Rise

UK CPI fuels massive selloff. Swap rates and Treasury yields rose across the curve after UK CPI came in at 10.1% YoY, which exceeded forecasts of 10.0%. As a result, the 2- and 10-year Treasury yields rose ~13 bps each, settling at 4.56% and 4.14%, respectively. James Bullard added fuel to the fire after he said that it is good for markets to price in future hikes by the Fed, as this will force officials to “follow through” with substantial hikes. Markets continue to price in for a 75 bp hike in November, and a hike of the same size is very well on the table for December..   

Analysts see deposit costs rising in 2H22, even further in 2023. As conditions tighten, lower liquidity is expected to lead to higher deposit betas for community banks. Deposit beta stickiness at the start of the Fed hiking cycle earlier this year was a positive for bank earnings, but repricing should be expected in the coming months. Betas could increase to 9% by the end of the year, and up to 38% at the end of 2023 according to some analysts. While this is an earnings headwind, community banks could see loan-to-deposit ratios increase and margins expand as a result of deposit outflows of up to 1.75% in 2022 and 0.50% in 2023 based on projections. As earnings season progresses, analysts will be watchful of liquidity metrics to update their outlooks.

Day ahead. Fed voters Philip Jefferson (neutral), Lisa Cook (dove), and Michelle Bowman (hawk) will speak tomorrow afternoon. Existing home sales and Philadelphia Fed Manufacturing data will be released in the morning.

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