Markets saw a notable shift in tone last week as a mix of softer economic data and favorable inflation readings brought some relief to interest rates and renewed optimism in key sectors.
Rates & Yield Curve
- Yields declined modestly last week, with the 2-year swap rate falling 7 bps to 3.68% and the 10-year swap down 9 bps to 3.86%.
- Despite the weekly drop, rates still ended May higher overall, with 2-year and 10-year swaps rising 31 bps and 22 bps, respectively, over the month.
- The yield curve steepening trend may accelerate in coming quarters as inflation data softens and market expectations shift.
Key Economic Data
- Consumer confidence printed strong last Tuesday, though this was contradicted by weaker Q1 consumer spending, revised down to 1.2% from 1.7%.
- Initial jobless claims came in above expectations at 240K, signaling a potential cooling in the labor market.
- Inflation readings were encouraging:
- Headline PCE (Fed’s preferred measure) fell to 2.1% YoY, just above the 2% target.
- Core PCE held steady at 2.5%, down slightly from the previous month.
This Week: Jobs in Focus
- A heavy slate of labor data includes JOLTS (Tuesday), ISM surveys, weekly jobless claims (Thursday), and the all-important nonfarm payrolls (Friday).
- May payrolls are expected to show 125K new jobs, down from 177K in April, with unemployment steady at 4.2%.
- Fed Governor Waller’s dovish remarks over the weekend supported rate cut expectations despite inflation risks tied to tariffs.
Cap Pricing & Rate Expectations
- Cap pricing for a 2-year 5% out-of-the-money cap remains stable at 11.5 bps, similar to 60 days ago.
- Rate cut expectations have fluctuated:
- Start of 2024: 7 cuts forecasted
- Now: Fewer than 2 expected in 2025, and under 3 for 2026
- Implied Fed funds rate for end of 2025 hovers just below 3.9%
Sector Insights
- Retail real estate remains resilient, with strong broker pipelines and continued deal activity, particularly in the drugstore segment.
- CVS deals are moving, while Walgreens and Rite Aid face uncertainty due to corporate restructuring and privatization efforts.
- Deal execution continues to face headwinds from buyer financing delays, though sentiment is broadly positive heading into summer.
Agency Market Commentary
- Little impact from the Fannie/Freddie privatization chatter or ratings downgrade headlines.
- Agency spreads remain tight, with some value seen in farm credit and homeland discount notes.
- Agencies continue to generate substantial revenue for the government, making a full privatization scenario politically complex.
Political Backdrop
- The “Big Beautiful Bill” faces opposition in the Senate over Medicaid cuts and deficit concerns.
- Expect movement by mid-summer with a looming August debt ceiling deadline.
Outlook
- With inflation moderating and labor data softening, market focus is shifting toward timing, not just quantity, of future Fed rate cuts.
- Borrowers should look to leverage current flatness in short-term rates, while closely monitoring incoming jobs data for further clues on the Fed’s path.
