75bps Returns as the Expected Rate Hike for Next Week

    • The initial chatter about a possible 100bps rate hike that came after the ugly June CPI report has died down and a 75bps rate hike has returned as the consensus outlook for next week’s FOMC meeting.

     

    • The chatter died down immediately after Friday’s University of Michigan Sentiment Survey found long-run inflation expectations had edged lower to 2.8% from 3.1% previously and 3.0% expected.

     

    • The Fed has been concerned about inflation expectations becoming “unanchored” with a bias higher, so the decline in the survey’s expectation reading was a welcome bit of news and helped dull the talk of 100bps hikes.

     

    • There’s little in the way of fundamental news this week and with the Fed in pre-meeting radio silence the market will likely mark time this week trading on bits and pieces of information.

     

    • This morning, Treasuries are on the defensive as the more measured pace of Fed rate hikes is reflected in higher yields and equity prices.

     

    • Even with a so-called measured pace, the Fed is still expected to get to its terminal rate of 3.50-3.75% by year-end and the market has a couple rate cuts priced into 2023 with the year-end rate at 3.00%.

     

    • In addition, while the FOMC meets next week, the European Central Bank meets on Thursday with an initial 25bps rate hike expected.  That will make every developed market central bank engaged in tightening policy which is yet another reason the Fed can probably take a more measured approach to its rate hikes.

     

    • While economic news will be light this week what little we do get will be centered on the housing market with June starts and permits tomorrow and existing home sales on Wednesday. With yields coming off the boil in mid-month some stabilization in activity is expected.

 

Source: Bloomberg


 

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 3.19 3.25 3.29 3.38 3.52 3.97
0.50 3.18 3.22 3.23 3.27 3.37 3.86
1.00 3.17 3.19 3.20 3.23 3.28 3.74
2.00 3.18 3.14 3.15 3.17 NA
3.00 3.10 3.10 NA
4.00 3.05 NA
5.00 3.02 NA
10.00 NA

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Published: 07/18/22 Author: Thomas R. Fitzgerald