New York Fed Survey Shows Credit Crunch Worries, Inflation Expectation Spike; Treasury Yields Jump

A surprise spike in inflation expectations, even amid tightening credit conditions, adds further complexity to the Fed’s rate hike debate.

The New York Fed’s March inflation forecasts added further upward pressure on Treasury bond yields and the dollar Monday as investors look to one final rate hike from the central bank next month in Washington following Friday’s surprisingly solid jobs report. 

Year-ahead inflation expectations jumped by 5 basis point to 4.7% in March, the New York Fed said in its closely-tracked Survey of Consumer Expectations, even as participants noted the tightest overall credit conditions since 2015 in the wake of the Silicon Valley Bank collapse and the closure of Signature Bank shortly afterwards. 

“Respondents were more pessimistic about future credit availability as well, with the share of households expecting it will be harder to obtain credit a year from now also rising,” the survey noted.  

Friday’s jobs data showed the U.S. economy added 236,000 new jobs last month, a figure that takes the year-to-date tally to just over 1 million, with the Bureau of Labor Statistics revising its February estimate higher and its January figure lower. 

Wage data was also mixed, with average hourly earnings rising 0.3% on the month, matching Street forecasts, but slowing to 4.2% on the year compared with the 4.6% pace recorded in February.

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Still, the odds of a March rate hike remain firm, with the CME Group’s FedWatch indicating a 67.7% chance the Fed will lift its target rate to between 5% and 5.25% next month in Washington, although the market is also forecasting a September Fed cut as the economy turns south over the summer months.

Benchmark 10-year Treasury note yields were marked 5 basis points higher from Thursday levels at 3.417% while 2-year note yields were last seen trading at 4.001%.

The U.S. dollar index, which tracks the greenback against a basket of six global currency peers, was marked 0.62% higher at 102.72 after hitting a two-month of low 101.40 prior to Friday’s jobs data. 

On Wall Street, the S&P 500 was marked 15 points lower by mid-day trading while the Dow Jones Industrial Average gained 6 points. The tech-focused Nasdaq was down 70 points.

The New York Fed survey data likely puts Wednesday’s March CPI reading in stark focus, as investors look to any signals of consumer price cooling following Friday’s mixed March jobs report and a series of weaker-than-expected labor market readings.

Economists are forecasting headline inflation will slow to an annualized rate of 5.2%, with the closely-tracked core reading at 5.5%, compared to readings of 6% and 5.5% respectively over the month of February. 

Growth prospects are beginning to dim, however, amid concerns that tighter credit conditions will choke off new investment, triggering a slow-down in hiring and a corresponding pullback in GDP

Activity in the most important sector of the U.S. economy slowed notably last month, according to data from the Institute of Supply Management’s benchmark survey, with two important sub-components — measuring employment and prices paid — indicating cooling inflation pressures heading into the spring and summer months.

Jobs Report: 236,000 New Hires In March but Wage Growth Eases; Unemployment Slips to 3.5%

The ISM’s March survey of manufacturing activity, meanwhile, was pegged at 46.3 — well below the 50 mark that separates growth from contraction — with Bank of America’s weekly “Flow Show” report noting that readings below 45 have preceded every U.S. recession for the past seven decades. 

Meanwhile, around 228,000 Americans filed for jobless benefits over the week ending April 1, a tally that was well ahead of the Street’s forecast of 200,000 new claims. The prior week’s tally, meanwhile, was revised to 246,000 from an original estimate of 198,000, suggesting weakness has been evident in the job since the collapse of Silicon Valley Bank.

The Labor Department data followed figures from Challenger & Gray’s closely-tracked report of monthly layoffs, which showed job cuts rising 15% over the month of March, to 89,703, more than triple the figures recorded over the same period last year.

Bank of America noted that around $87.8 billion of investment funds have moved into cash last week, with some $900 million exiting the stock market. 

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