Rates Feel Pain from Europe

This week saw rates recovering a little and looking to start their climb back down after recent highs. That was shattered on Friday with news that the European Central Bank plans to hike rates as soon as the end of April if the Iran war pushes inflation too far above their targets.

Global yields (rates) jumped in one of the largest single-day jumps in recent memory. Additionally, comments by normally dovish (rate cut-friendly) Federal Reserve (Fed) Governor Waller, which sounded hesitant about future rate cuts, added fuel to this fire. The labor market is clearly weak, structural inflation has come down, and it is clear that the tariff inflationary impact was tame. Despite this, Iran has overshadowed the hope for rate cuts in the near future. The Fed is in “wait and see” mode.

PPI Report: Inflation Beats Expectations

The Producer Price Index (PPI) wholesale inflation report was released this week for February. It was much hotter than expected, with headline inflation rising 0.7%, 0.3% more than expected. The Core PPI rose 0.5%, higher than the 0.3% expected. Wholesale inflation is the pricing changes that companies pay before they sell a product to an end consumer. 

These price changes don’t always get passed along to the consumer. Prolonged higher PPI will eventually be felt by the consumer, but some price increases will not get passed through. This is clear in the CPI vs PPI reports, where the CPI showed a 2.5% core inflation while PPI rose to 3.9%. This surprise PPI adds caution to the Fed for any future rate cuts.

Fed Meeting: No Cut, Hawkish Tone

This week’s Fed meeting ended as expected with no rate cut. Steven Miran was the only dissenting vote. Chairman Powell was viewed as being hawkish (opposed to rate cuts) in his answers at the press conference. There is still one additional rate cut showing on the “dot plot” of the Summary of Economic Projections (SEP) that was released. 

Chairman Powell seemed to focus on labor stability, with the unemployment rate remaining low at 4.4%. He ignored the fact that almost no jobs were created in 2025 and that many people have entered the “gig” economy and work multiple jobs to supplement their employment.

Mortgage-Backed Securities: Sharp Sell-Off

Here is a picture of the last 3 months of mortgage-backed securities:

The large red candle on the far right represents Friday’s sell-off, the steepest single-day decline shown in this 3-month window, driven by the ECB news and Fed commentary. Fingers crossed that there will be a bounce. It has been a continuous decline since the beginning of the Iran conflict.

Looking Ahead: Light Economic Calendar

Next week is a bit quiet with no major releases: 

• Tuesday, March 24: ADP Weekly Employment Report 
• Thursday, March 26: Initial and Continuing Jobless Claims.