Will The Fed Pause?

Swap rates slide following Fed speakers calling for a June pause. Swap rates and Treasury yields declined today after multiple Fed speakers suggested that a June pause is on the horizon. Philip Jefferson noted that while a skip may be imminent, it does not signify the peak, as, “Skipping a rate hike at a coming meeting would allow the committee to see more data before making decisions about the extent of additional policy firming.” Futures currently project a ~30% chance of a 25bp hike in June and an ~80% chance of a hike by the end of July. The policy-sensitive 2-year yield fell ~5bps to 4.40%, marking a ~16bp fall since the beginning of this short trading week.

Beige Book signals economic and labor market strength, with slight cooling. The May Fed Beige Book released today characterized overall economic activity as little changed in April and early May across Federal Reserve districts. Four districts reported small increases in economic activity, six reported no change and two reported slight to moderate declines. Employment and prices both continued to increase in most districts, albeit at a slower pace. Contacts across districts noted continued difficulty finding workers across sectors, however some highlighted easier hiring in the construction, transportation and financial sectors. Consumer prices climbed due to solid demand and rising costs, however some districts noted greater consumer price sensitivity. This information comes alongside the BLS April Job Openings report, the first of a series of jobs reports this week, which exceeded expectations and offers an early clue about Friday’s Nonfarm Payrolls release that may complicate the Fed’s hiking outlook amid calls today from Fed speakers for a June pause.   

Day ahead. Employment sector figures will be released in the early morning, with ISM Manufacturing PMI set to follow at 10 AM. The afternoon will feature mortgage rate data and commentary from neutral Fed voter Patrick Harker.

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