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Ten-Year and Thirty-Year Treasury notes traded with a yield in excess of 4% this week, moving back above yield levels not seen since November 2022. Market sentiment has shifted as the disinflation theme prevalent at the beginning of the year is dissipating with the resilient economic data thus far in 2023. The Chandler team continues to hold the view policy rates will rise to a sufficiently restrictive stance and stay on “hold” for the balance of 2023 to allow the tightening of financial conditions, notably exhibited via the increase in real interest rates, to work its way through the financial system and put downward pressure on inflation. Given the Chandler team’s view on the trajectory of monetary policy, we continue to believe the interest rate differential between the Fed Funds rate and the Two-Year Treasury note should be relatively tight. Given the 70 basis point move higher in the Two-Year Treasury note yields between January 31st and today, to a yield around 4.90%, the market is coming around to our view.

The market digested top-tier economic data this week along with a hawkish tone reflected in the minutes from the Federal Reserve’s Open Market Committee meeting on February 1st. Both the headline Personal Consumption Expenditures (PCE) Index and the Core PCE Index (excluding food and energy) accelerated more than expected in January, increasing 0.6% month-over-month. The headline index rose 5.4% and the core index 4.7% year-over-year, exceeding both last month’s increase and consensus expectations. Prices for both goods and services appreciated on a widespread basis. Expenditures on goods were led by motor vehicles and pharmaceuticals, while spending on services was led by rent and food services. The personal savings rate increased to 4.7%, to a seven-month high.

This week’s top tier economic data focused on inflation both at the consumer and producer level. The headline Consumer Price Index (CPI) rose 0.5% in January versus the upwardly revised -0.1% reading in December. Inflation increased 6.4% year-on-year, down from 6.5% in December. Core CPI, excluding the volatile food and energy components, increased to 0.4% in January and 5.6% on a year-on-year basis, decelerating from 5.7% in December. Key factors contributing to inflation in January were housing, food, gasoline, and natural gas. Inflation at the producer level rebounded in January above the consensus of market participants. The Producer Price Index (PPI) jumped 0.7% last month and 6.0% year-over-year bolstered by higher energy costs. Core PPI, excluding the volatile food and energy components, rose 0.5% in January and 5.4% year-over-year. Inflation appears to be stickier than many market participants anticipated and remains above the Fed’s target providing another data point for the Fed to continue to increase the federal funds rate at its next meeting.