by (Bloomberg) — The bond market sell-off that sent some yields this week to their highest levels in more than a decade has investors scrambling to look past the Federal Reserve’s next move in July.
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With economic data all but dispelling doubts about a Fed rate hike at the end of the month, attention shifted to the central bank meeting in September and investors remained deeply divided. Inflation data released next week could be decisive, but even if benign, the need for further action is likely to remain unclear at that point.
It is a recipe for continued turmoil, possibly exacerbated by the long gap between the July and September Fed meetings and the holiday season. The ICE BofA MOVE Index, which measures the expected volatility of Treasuries, rose the most since early March on Thursday as two- and five-year yields soared to their highest levels since 2007.
“Volatility will continue because the Fed is still up and running,” said Ray Remy, co-head of fixed income at Daiwa Capital Markets America. “The economy is in good shape judging by the job numbers and inflation is still stubbornly high. So I don’t think we’ve seen the high yields.”
The counter-argument, put forward this week by Morgan Stanley and others, is that inflation is moderating in such a way that the Fed will be under less pressure after this month.
The consumer price index for June, to be released on July 12, is expected to show that core inflation, excluding volatile food and energy, slowed to a year-on-year rate of 5%, the lowest since November 2021.
Strategists at TD Securities are eyeing an even bigger slowdown, to 4.8%, and signs of cooling in the US Department of Labor’s June jobs report, released Friday, to hold, “making it very tricky for the Fed to raise after July,” said Gennadiy. Goldberg wrote. “However, the Fed will maintain a fall hike to prevent the market from pricing in cuts. This is one way they achieve tighter financial terms.”
Therefore, he wrote, positioning for Fed rate cuts next year in response to an economic slowdown, even if one is expected, is risky.
What Bloomberg’s strategists say
“It’s not done yet. As headline US CPI continues to decline from recent highs, the genie is out of the bottle and underlying structural drivers threaten to push inflation back up after the current period of disinflation has ended.”
— Simon White, macro strategist
For the full column, click here
At the end of this week, swap contracts tied to future Fed decisions were almost fully priced in for a quarter-point hike on July 26, and about a 45% chance of another hike by the end of the year, up from about 50% earlier in the week.
In May, the Fed increased its policy rate margin by a quarter point to 5%-5.25% for the 10th consecutive time. They decided in June to leave the impact of higher rates on the economy and banking system unchanged, but predicted two more hikes this year.
Positioning for rate cuts by the Fed normally means that short-term Treasury yields are expected to fall relative to longer-term Treasury yields – a theme that began to emerge this week despite the sell-off, which drove interest rates on 10 and 30 years to year-over-year. date highlights friday.
The two-year rate ended the week about 88 basis points higher than the 10-year rate, down from about 111 basis points at the start of the week. The spread remains near the widest in decades, a factor for those betting on the reversal.
The long gap between the July and September Fed meetings has an asterisk: Fed Chairman Jerome Powell’s annual speech at the central bank symposium in Jackson Hole, Wyoming, in August. Fed leaders have often taken the opportunity to offer market-driven advice on the outlook for monetary policy.
“There will be more volatility in rates, especially as we are also in a period where people usually go on vacation,” said Chris Ahrens, a strategist at Stifel Nicolaus & Co.
Ironically, even volatility cannot be counted on. Strategists of Goldman Sachs Group Inc. say the Fed’s pause in June makes it less likely they’ll make the mistake of doing too much. Taking into account that the banking sector and market liquidity have stabilized, interest rate volatility is “still quite high” and likely to fade, Praveen Korapaty said.
What to watch
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Economic data calendar
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July 10: Wholesale Stocks; consumer credit
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July 11: NFIB Small Business Optimism
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July 12: MBA mortgage applications; Consumer Price Index; Fed Beige Book
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July 13: Producer Price Index; unemployment claims; federal budget statement
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July 14: Import and Export Price Indexes; Sentiment from the University of Michigan
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Federal Reserve calendar
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July 10: Fed Vice Chairman of Oversight Michael Barr; San Francisco Fed President Mary Daly; Loretta Mester, president of the Cleveland Fed; Atlanta Fed President Raphael Bostic
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July 12: Tom Barkin, President of the Richmond Fed; Minneapolis Fed President Neel Kashkari; bostic; Master
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July 13: Fed Governor Christopher Waller
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Auction calendar:
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July 10: 13 and 26 week bills
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July 11: bills for 52 weeks; 42 days CMB; 3 year notes
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July 12: 17-week bills; 10 year notes
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July 13: 4 and 8 week bills, 30 year bonds
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–With help from Edward Bolingbroke.
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