February 2023 Rates Recap

Blu Putnam, Chief Economist

Volatility expectations in U.S. rates markets are changing. Once the Fed acknowledges that peak rates have been reached, the new narrative will focus on data dependency. Both inflation and jobs data may produce some confusing reports. And, the ups and downs of the data will intersect an environment in which Fed guidance (holding rates high for a long time) is at odds with the futures markets (rate cuts starting in late 2023 and deepening into 2024).

Markets will debate the disconnect between the headline CPI and the Fed’s preferred PCE core, ex-food and energy, inflation data. As 2023 progresses, headline inflation may drop below core inflation, sparking renewed debate about whether the Fed will respond to the good news on headline or the less good news on core. 

The jobs data may be even harder to interpret. The BLS just released its benchmark revisions in the January 2023 data, and they included huge increases to employment over 2022 not previously reported. And the pandemic and the rebound have changed spending habits in ways that are likely to make seasonal adjustment more difficult to decipher as some sectors continue to add jobs while others cutback.

Finally, there is the debt ceiling debate. The politics are more polarized this time around, suggesting a more destabilizing debate than the episode in 2011 in which the U.S. credit rating was downgraded.

Volatility calmed down in late 2022, but data dependency may bring some sharp swings in sentiment in 2023.

Track volatility with CVOL

Ensure you're ready for April 14, 2023 when all Eurodollars (excluding May and June futures and options) will be converted to SOFR equivalents.

Review the implementation plan for details, or use the daily Indicative Cash Flow Report to see how Eurodollar positions would be converted to the corresponding SOFR positions, as well as the cash flows for each.

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