An unchanged policy outlook (see Fed Brief) from the FOMC last week firmed expectations for another rate hike in May and heightened expectations for further tightening thereafter.  The immediate effect was to send 10-year Treasury yields to a 22 month high as the markets  fear a 5% 10 year yield in the not too distant future.   

The Fed was anything but transparent in its view ahead other than repeating the inflation risks which help drive policy rates higher.  The market is feeling its way for policy direction after the May meeting.   The July funds futures contract currently prices in just 30% probability for a rate hike at the June 28-29 meeting.  However, the August contract puts the odds for a 5.25% policy rate at 65% for the following meeting on August 8 and the implied policy rates peak at 5.175% in October. 

Given the tone of the policy statement Briefing.com also expects a May 25 bp hike which is likely to be followed by another hike in either June or August given the Fed's inflation concerns.  If the July contract holds with expectations for a June pause, we suspect the Fed will follow its lead as warning of the potential for further policy rate hikes ahead will maintain the pressure on long bond yields which help to slow the economy. 

Economy

Top tier indicators bookend the week.  A rise in the national ISM manufacturing index is consistent with the gains in the regional manufacturing indices (using a ISM calculation).  Capital investment prospects remain strong given the continued strong growth in corporate profits (profits/output reached a 39 year high in Q4) and the record size of net cash flow.  Amid the volatility created by booming aircraft orders the factory orders data reflect a mid cycle slowing but our expectations remain strong.  Factory orders and sales are 7% higher from a year ago as capital goods orders stand at 11% yoy.  Moreover, the long production cycle in aircraft leave will leave a strong lift to sales  for many quarters to come.

The week ends with the March employment report.  Briefing.com is looking for a 190K rise in payrolls as the unemployment rate returns to January's post recession low of 4.7%.  The market will be closely watching earnings growth as well given the strong 4.8% annualized gain over the last three months.   The consensus forecast has had an average miss of 60K over the last 6 months as the 165K average payroll growth over that period compares to February's 243K.

Vehicle sales, construction spending and the non-manufacturing ISM index also carry weight in the week.  All the week's economic reports are previewed and linked to the indicator names in the economic calendar as charts, history and forecast rationale provide Briefing.com's perspective.

Treasury Supply

The January - March quarter ended with a record $159 bln of new cash raised by the Treasury.  The Treasury estimated a larger $188 bln as the dance around the debt ceiling constraints shifted some of the weight over to non-marketable debt. 

In preparation for the massive mid-month inflow of individual tax receipts the Treasury is slicing down the sizes of the weekly bill auctions as cash management bills provide some near term financing.  The Treasury's latest estimates show a $30 bln pay down over the current April - June quarter.

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Questions, comments or feedback may be e-mailed to the author: Timothy E. Rogers