Yields continued to march higher this week, driven by increased talks of fiscal spending and strong economic data. With these current headlines, investors are left to decipher the effects on yields and future Fed policy. Regarding Washington, markets are struggling to digest the increased spending reportedly coming in the coming months. This results in rising yields as the federal government will need to sell additional Treasuries to fund the spending. On top of this, the ongoing battle for the speakership adds an additional level of uncertainty, as Washington is gridlocked until the seat is filled.

 

On the economic data front, we saw Retail Sales this week come in much higher than expected. The continued spending by Americans underscores the resilience in the economy that has been discussed for the past couple of months. The question that markets are trying to answer is whether this continued resilience will lead to additional Fed rate hikes. While it does seem like the Fed will leave rates unchanged in the upcoming meeting, the possibility of rate hikes in future meetings remains a real consideration.

Fed Chairman J. Powell is scheduled to speak on Thursday, and this speech is highly anticipated by the markets. It will be interesting to hear his take on the ongoing strength of the American economy and future fiscal spending, and its potential impact on Fed policy. Regardless of the direction he takes in his speech, it will undoubtedly influence the markets, and as such, we expect the volatility to persist.