US Interest Rates Fall At The Front End Of The Curve After Latest FOMC As Hiking Cycle Close To The End

During his FOMC Q&A session Powell expressed how difficult it is to quantify the impact of the recent regional banking crisis, which has led to widely different market interpretations: some traders think the Fed is done, while others see two more hikes

Spreads between 1Y Forward 1Y OIS and 1Y OIS Rates in USD and Euro | Sources: phipost.com, Refinitiv data


Crazily Volatile Week For Rates, US Money Markets Now Price In More Than 3 Rate Cuts Through Year End

Regardless of whether the FOMC results in a 25bp hike or no hike, clarity of purpose will be critical as the Fed fights to restore confidence in the regional banking sector

USD 1 Month Into 1Y ATM Swaption Implied Volatility (Normalized) | Source: Refinitiv


The US Yield Curve Bull Flattened For The Week, Driven By Much Lower Inflation Breakevens

The market fright around Western regional banks impacted mostly equities, but did cause a jolt to money markets: basis swaps were extremely tight on Tuesday and got wider into the weekend, though nothing to worry about for the moment

1Y 3M BSBY - 3M SOFR OIS Basis Swap | Source: Refinitiv


US Inflation Expectations Rose Further This Week, With 1Y TIPS Breakeven Now Up 200bp Since Early January

The front end of the curve continues to lead the action, as the market stays focused on very short-term event risk: Powell's appearance before the Senate this week and the latest employment report coming on Friday

US TIPS Inflation Breakevens | Sources: phipost.com, Refinitiv data


The Front End Rates Selloff Continues: Peak Fed Funds Rate Now Above 5.40%, As June FOMC Fully In Play

If confirmed over the coming weeks, the positive recent data in the US could put the Fed in a difficult position at the March FOMC, with the soft-landing scenario becoming increasingly challenged by a more hawkish outlook

1-Month Change In CitiFX Economic Surprise Indices | Sources: phipost.com, Refinitiv data


US Rates Sell Off Across The Curve, Led By The Front End, Driven By A Repricing Of Short-Term Inflation Expectations

The recent US activity data has been strong, and core inflation has been coming down very slowly, pointing to a possible reacceleration of inflation: the risk of overtightening has come down and the risk of not doing enough has gone up

US TIPS Inflation Breakevens | Sources: phipost.com, Refinitiv data


Sharp Rise In Front-End Rates, Inflation Breakevens And Volatility Ahead Of Upcoming January CPI Report

The rise in implied volatilities reflects diminished comfort about the distribution of inflation / rates outcomes, and we've seen slightly more hedging of the left tail (i.e. lower rates) with the recent reduction in the curve inversion

Overnight SOFR 3M Into 2Y Swaption Implied Volatilities | Sources: phipost.com, Refinitiv data


Sizable Moves In STIR Markets On Friday As Employment Report Blows Past Expectations, Puts >5% Peak Rate Back In Play

We're getting close to peak US rates, with just 45bp of additional hikes priced in forwards, and yet economic performance remains strong, putting in question whether financial conditions are restrictive enough

Disinflationary Narrative Seen In Spot 6-Month US CPI Swap | Sources: phipost.com, Refinitiv data


Very Little Change In US Fed Funds Forward Rates This Week, With No Surprise Expected From The FOMC

Having said that, the event risk is tilted towards a more hawkish Fed, as disinflationary data over the last 3 months has led to a dovish repricing of the forward curve, which Powell has a good opportunity to lean against

Peak Rate And Following Rate Cuts Implied From 3M USD SOFR Futures | Sources: phipost.com, Refinitiv data


Weak US Economic Data, Fear Of Recession Mean Fewer Rate Hikes Priced Into US Short-Term Rates

Despite the negative recent incoming data, US consumers should see a rise in real income of about 3.5% this year, helped by substantial wage growth, which will push the "stronger for longer" economic theme for a good part of the year

Forward Rates Curves | Sources: phipost.com, Refinitiv data


US Rates Complex Feeling Hopeful That Inflation Is Normalizing, With A Soft Landing As The New Base Case

Even if headline inflation seems to be coming down rapidly markets are too sanguine about inflation pricing : 1Y TIPS breakeven around 1.80% and 1Y CPI swap at 2% look too low

1Y Inflation Pricing Looks Too Low | Source: Refinitiv


Fed Chooses To Ignore FCI Loosening, While The ECB Points To Unexpectedly Hawkish Path In 2023

The most surprising thing to us at this point is how low the market is pricing inflation 1Y forward, with the 1Y US TIPS breakeven now around 1.80%, while the Fed's own forecast for the end of 2023 is above 3%

US 1Y TIPS (912828B25) Breakeven Inflation | Source: Refinitiv


Big Macro Week Ahead Gives The Fed An Opportunity To Reset Recent Dovish Leanings

The easing in financial conditions over the past month has not been met by any pushback from the Fed, but the December FOMC is as good a time as any to change expectations and market pricing

Implied Hikes For Upcoming FOMCs | Sources: ϕpost, Refinitiv data


Mixed US Data And Powell's Speech Brought Lower Real Yields, Higher Inflation Breakevens This Week

The Fed Chair's speech was widely interpreted as dovish, and money markets hurried to price in a lower peak rate as well as two full rate cuts in 2023, both of which seem contrary to the stated Fed policy of reaching a higher terminal rate and holding there for a while

US TIPS Inflation Breakevens | Sources: ϕpost, Refinitiv data


US Yield Curve Bear Flattens, As Hawkish Bullard Speech Puts Terminal Rate Range At 5% To 7%

The sharp drop in breakevens and the flattening of the real yields curve reflect the credibility of the recent Fed shift to a "higher for longer" rates environment (with sub-par GDP growth and lower inflation expectations)

US TIPS 5s30s Spread | Sources: ϕpost, Refinitiv data


Fed Likely To Push Back Against Overreaction To Positive CPI Print, As Inflation Still Very Elevated

The CPI surprise brought huge moves across asset classes, with rates differentials pushing the dollar lower and driving one of the largest one-day loosening in the GS financial conditions index

1M USD OIS Forward Rates Curve After CPI Surprise | Sources: ϕpost, Refinitiv data


Fed Signals Pivot Towards Smaller Hiking Increments, Higher Terminal Rate

Perhaps the most important outcome is that the Fed no longer makes decisions based on the evolution of spot inflation data, but instead looks at the levels of rates (with uncertainty about the lagged impact of their actions), hoping to maximize the chances of a soft landing

Fed Funds Rate Priced For The Next FOMCs | Sources: ϕpost, Refinitiv data


US Yield Curve Flattens, Real Yields Fall Since Fed Hint At Policy Downshift From December

Though we understand the concerns caused by the UK LDI scare and the recent deterioration in bond market liquidity, slowing down the pace of hikes before inflation is firmly under control looks premature

3M Into 2Y USD Swaptions Implied Volatilities Still Skewed To The Upside | Sources: ϕpost, Refinitiv data


Front-End Rates Up Slightly, With Higher Inflation Breakevens, And A Steepening Of The Curve

Although two consecutive 75bp hikes are still our baseline for the next 2 FOMCs, we expect continued rates volatility and worsening market liquidity into year end

US TIPS Inflation Breakevens | Sources: ϕpost, Refinitiv data


US CPI Brings The Fed's Terminal Rate To 5% In 1Q23, Money Markets Still Price In A Rate Cut In 4Q23

Compared to where the market currently sits, we see more upside risk to short rates over the next twelve months, and more downside risk from 2024 onward, with the likelihood of a recession not fully priced in


Solid US Economic Performance Lead Front-End Rates Higher This Week, Driven By Higher Breakevens

It was a good week for the Fed's soft-landing scenario, as labor demand is cooling without creating unemployment, and the recent UK situation might give the Fed a reason to slow down the pace of hikes, depending on how the CPI data looks next Thursday

Changes In Market Implied Hikes At Upcoming FOMCs | Sources: ϕpost, Refinitiv data


Another Crazy Week Across The Rates Complex, With Volatility Reaching Worrying Levels In Sterling

Although US rates have risen significantly over the past weeks, the positive economic momentum in services could drive the peak Fed Funds rate higher than current expectations

1-Month USD OIS Forward Rates | Sources: ϕpost, Refinitiv data


The Fed Did A Good Job Of Reanchoring The Front End Higher, With The 3m/2Y Treasury Spread Rising Nearly 40bp Since The FOMC

Crazy week in macro markets: the BOJ intervening to help the Yen for the first time since 1998, signaling that yield curve control is likely coming to an end soon, and Cable getting shattered by a weak BoE hike and Truss' inflationary new economic plan (with rumors now flying of a possible 100bp BoE hike before markets reopen on Sunday)

May 2023 Fed Funds Future Implied Yield & 3M2Y Treasury Spread | Source: Refinitiv


Front End Yields Rise, Driven By Breakevens, While The Curve Continues To Bear Flatten

Despite the Fed's "higher for longer" messaging, money markets still price in rate cuts next year after peaking in March 2023 (EDZ23-EDH23 spread at -42bp), something Powell will no doubt have to address at his FOMC press conference

Eurodollar futures spreads | Source: Refinitiv


Higher Yields, Flatter Curve Across Rates This Week, As US Economy Continues To Show Strength

Although the US CPI data next week is likely to show a sharp deceleration, the Fed indicated this week its preference for a 75bp hike at the next FOMC, which drove volatility lower and asset prices higher

Impact of the WSJ Leak Across Asset Classes: Lower Short-Term Inflation Expectations an Equity Vols | Source: Refinitiv


US Treasury Curve Bear Steepened This Week On The Back Of Lower Breakevens And Higher Real Yields

Having been outhiked by the Fed, foreign central banks are under pressure to act and FX markets are forcing their hands to be more hawkish: the ECB will likely go for 75bp at their next meeting and the BoE might opt for 100bp to restore its credibility

1-Month EONIA OIS Forward Rates Curve | Sources: ϕpost, Refinitiv data


Jackson Hole Leads To Hawkish Repricing At The Front End, But Market Still Expects Rate Cuts Next Year

The clarity and brevity of Powell's speech were definite positives, but the Fed continues to place perhaps undue importance on monthly volatile data points to chart its course, when short-term real rates remain far from restrictive

Historical Pricing of Hikes (in basis points) at the September 2022 FOMC | Source: Refinitiv


Breakevens Keep Falling At The Front End Of The Curve, But UMich Long-Run Inflation Expectations Tick Higher

The much-improved market sentiment and rallies in risky assets are unwinding some of the tightening in financial conditions, an unwelcome development if the Fed wants to win the fight against inflation

US CPI 6-Month Inflation Swap Forward Curve | Sources: ϕpost, Refinitiv data


Very Strong Employment Data Lifts Yields And Flattens The Curve To End A Week Marked By Positive Economic Surprises

The narrative last week, driven by the Fed, of a possible recession and a pivot towards a more balanced policy fell on its face this week: economic data came in stronger than expected, which brought higher real yields on the realization that inflation is still very much the focal point

Rate Hikes Expected At The September FOMC (in basis points) | Source: Refinitiv


Forward Breakevens Move Higher, Real Yield Curve Steepens As Fed Pivots Towards Broader View Of The Economy

It's important to note that pivoting away from a sole focus on inflation is likely not as dovish as current market pricing: with sticky inflationary pressures still rising, most notably in the employment cost index, the Fed will have to keep rates higher for longer (i.e. forward rates look too low at this point)

3-Month USD SOFR OIS Forward Rates Curve | Sources: ϕpost, Refinitiv data