The music is currently playing for the role of Fed Chair next year. When the music stops, Yellen may or may not still have a seat. News came out this morning that Trump was meeting with former Fed governor Kevin Warsh about filling the role. Warsh is also the son-in-law of one of Trump’s long-time friends, and is considered to be a “hawk” on the spectrum of dovish vs hawkish policymakers.
Hawks favor higher rates, relative to doves, and less accommodation. As such, rates spiked this morning when the news hit, but never broke above yesterday’s domestic-session highs. Prior to that news, Core year-over-year PCE (one of the Fed’s favorite inflation metrics) fell to 1.3% from 1.4% last month. The Fed would prefer to see this at 2.0%, so the 1.3% result is rate-friendly. Indeed, bonds improved slightly after the 8:30am data.
More inflation-related data arrived at 10am in the Consumer Sentiment numbers. This report includes 1 and 5-year inflation expectations, and the Fed has plainly said it follows these in addition to official measurements of inflation. The 5-year metric fell to 2.5 from 2.6 last month. While that’s not the lowest it’s ever been, 2.5 is in a very low range, long-term. This may have helped bonds put an end to the selling inspired by the Trump/Warsh meeting (that news hit roughly 13 minutes before Consumer Sentiment).
From there through the 3pm close, bonds didn’t move much–simply holding sideways at slightly weaker levels. Volatility increased after the 3pm. This is common on month/quarter-end trading days. MBS are underperforming Treasuries heading into the after-hours trading session, adding slightly to negative reprice risk.