Current market outlook from Mark Weiss

Heather: Welcome back to another episode of treasury market minute. My name is Heather Froehlich and I am the senior vice president director of state treasury sales here at Federated Hermes. Today I am delighted to have with me Mark Weiss, senior portfolio manager in our prime liquidity group. So Mark, with the Iranian conflict still in the headlines would you be able to provide some insight into how the market for prime securities has traded since the start of this issue?

Mark: Sure so first to define the prime securities market you're talking about fixed income securities issued by banks and corporations with maturities of less than 13 months. So commercial paper CD's short corporate notes and bank notes and whenever any market becomes stressed whether it's stocks or bond markets etcetera what you see there's a widening of bid ask spreads. So basically, you can buy a security at a price but if you go to sell that security it's going to be a lower price and the more stress the market becomes the wider those better spreads get. The prime securities market has traded very normally since the beginning of this of the Iran conflict. We have been buying and selling securities with absolutely no problem at all and at minimal bid ask spreads.

Heather: Thank you and let's switch gears to inflation. There were some recent inflation prints last week, so what are our forecasts for rates moving into the June FOMC and through the rest of 2026, based on the current data?

Mark: Well as we know the Fed has a dual mandate for maximum employment and price stability. So making sure that inflation remains in check and the Fed's concern up to this point has been that the higher oil prices that we've seen since the beginning of the Iran conflict will last long enough that they work their way into core inflation and become a broad-based problem. So last week what we had was the CPI, which is the consumer price index and the PPI the producer price index, two of the leading inflation indices that we have for the US. The core CPI increased from 2.6% to 2.8% and the most core component of the PPI, the core core PPI, increased from 3.7% to 4.4%. Now on the surface these seem like notable increases in these metrics, but the fed's concern has more to do with how these underlying components of these indices translate into the PCE, which is their preferred measure of inflation and that will be released on May 28th.

Mark: Given the CPI and the PPI and the underlying components, consensus for the PCE is for it to increase from 3.2% 3.3%. Only a 10th of a percent, and if we think about the other side of the mandate the the labor market has been relatively stable we've seen the unemployment rate has remained low it's been 4.3 or 4.4 in each of the past five months and jobless claims have also remained low indicating that the labor market should be in good shape at least for the time being. When we think about activity, we also had retail sales for the month of April last week, and that has shown that the consumer has remained resilient despite facing higher prices at the pump. So essentially what we've got is that although this is a definite move higher in inflation it's still at a level where the Fed can be patient and wait for incoming data while monitoring developments in the Middle East. So what does this do for our outlook? Our base case is that the Fed is on hold in June and remain so through 2026. You know we don't believe in a hike yet because we think the Fed wants to be as accommodative as possible as long as inflation remains in check. Of course that will depend on developments in the Middle East, if we get a resolution sometime in the next month or so you know we could see a cut back on the table for 2026.

(Heather) 4:24 Very interesting thank you mark this concludes this episode of treasury market minute and we hope you found today's discussion to be very helpful thank you for joining us and we look forward to connecting with you again soon.