Today Is SMR Survey Day!
SMRA will conduct the weekly Portfolio Managers Survey today. Responses can be entered at the link here. Summary data will be proprietary to SMRA clients. The results will be presented on Wednesday. Thank you for your participation!
Portfolio Manager Survey
US Economic Chartbooks
Please see our Economic Week Ahead Chartbook for a discussion of this week's economic releases provided in a visually friendly format that includes graphs, brief descriptions of SMR's forecasts, and links to detailed data previews. If you missed anything from last week, see our Economic Week in Review Chartbook for a look back at the releases with links to full analyses.
Fixed Income Focus: Curve Flattening Dominates...2Yr Auction Preview
Treasury yields were mixed this past week as the curve continued to flatten, partially in response to tumbling oil prices.
Treasury will hold a $26.0 billion 2-year note auction on Monday afternoon. If the auction were to stop in line with the current WI bid it would be the highest stopout rate for a 2-year auction since October 2008. The 2-year note has also been trading especially tight in repo, and the exceptional front-end foreign demand for the 3-year during the mid-month coupon auction cycle, raises the possibility of demand for the 2-year as well.
Research Briefing - Inflation - the core reasons for the slowdown
The pace of inflation has decelerated markedly this year, as the annual advance in the consumer price index (CPI) has slowed to 1.9% in May from 2.7% in February and the core CPI (ex food and energy) has slipped to 1.7% in May from 2.3% in January. Similarly, the Fed's preferred inflation measure, the personal consumption expenditures (PCE) price index on an annual basis, has moderated to 1.7% in April from 2.2% in February and the core PCE price index (excluding food and energy) fell to 1.5% from 1.8% over the same time period. This slowdown represents a bit of a puzzle given that many top-down economic indicators suggest that inflation should be accelerating at this point in the business cycle or, at a minimum, stabilizes around the Fed's 2% inflation target. The top-down measures include a narrowing GDP output gap and a labor market near or at full employment. As resource slack in the economy diminishes, upward inflation pressures typically build. However, there are a number of structural changes in the economy that alter the historical relationship between labor slack, wages, and inflation.
Viewpoint - FOMC: Normalization planned, but inflation key
As fully anticipated, the FOMC raised the fed funds target range by 25 basis points to 1% - 1.25%. Additionally, in line with our expectations, the FOMC announced its plan for balance sheet reduction, with the paring of debt reinvestments intended to begin this year. The FOMC signaled it intends to continue normalizing interest rates and the balance sheet in the near-term. This is predicated on their unchanged view that inflation next year will reach the 2% target rate, despite the recent deceleration in inflation. We continue to expect the FOMC to impose one more rate hike in 2017, but downside risk to the inflation outlook means a greater possibility of a pause in rate hikes this year. To view the PDF, click here.