Yield Curve Flattens on Hawkish Fed Tone

Swap curve flattens as Fed officials suggest conditions have been met for rate increase. Fed Governor Chris Waller said that the Fed may need to raise rates sooner than expected if inflation remains elevated and job growth continues at its current pace. He also added that the Fed may need to “pivot to a faster taper based on the incoming data.” Outgoing Fed Vice Chair Richard Clarida voiced a similar tone in public comments, saying that the Fed may need to have a conversation about “increasing the pace” of the bond taper at its December meeting. The yield curve flattened substantially in response, 2-year swap rates climbing to YTD highs while 10-year rates fell 4 bps to 1.55%.

House passes $2 trillion climate and social bill. House Speaker Nancy Pelosi was able to rally enough troops to pass the legislation with only one Democrat siding with the Republicans in a nearly party-line vote. The package is an essential piece to President Biden’s Build Back Better agenda, but it still faces a tough task in getting passed in the Senate, where the current bill is expected to have many revisions. There will be no room for error for Senate Majority leader Chuck Schumer who will need all 50 Senate Democrats to support the final bill to be approved through the budget reconciliation process.

Week Ahead. Next week will be a busy one for economic data releases. On Monday, the market will get the latest look at existing home sales, followed on Tuesday by Markit’s manufacturing, services and compositive PMIs. Initial jobless claims will be moved up a day to Wednesday in light of the Thanksgiving holiday, along with personal consumption, income and spending data- the Fed’s preferred measure of inflation. The University of Michigan’s consumer sentiment survey will round out the day, with no releases happening during Friday’s holiday-shortened session.