October CPI Likely to Bolster Fed Hiking Intentions

  • Treasury yields are slightly higher this morning and stock futures indicated higher as the market awaits tomorrow’s mid-term elections, Fed Speak, and the October CPI reading on Thursday. The 10yr Treasury is yielding 4.16% while the 2yr is currently yielding 4.71%. The 2yr yield did trade as high as 4.80% last Friday morning but the move was reversed later in the day, but it remains a level that will likely be challenged again.


  • The early move in the 2yr Friday sent the 2yr – 10yr inversion to a new cycle low of -62bps but that move was quickly rejected and the spread sits at -55bps this morning. If the Thursday CPI report prints above expectations the 2yr yield and the 2yr – 10yr inversion could revisit those levels reached briefly on Friday.


  • Speaking of CPI, the October report is due Thursday morning with another solid round of inflation expected. The overall reading is expected up 0.6% for the month vs. 0.4% in September, with the YoY ticking down to 7.9% vs. 8.2% in September as some big 2021 numbers finally start to roll off the calculation. That should continue over the next several months.  The core rate is expected up 0.5% vs. 0.6% the prior month with the YoY rate ticking down to 6.5% vs. 6.6%. So, only grudging improvement in inflation is expected and that will keep a 50bps rate hike priced into markets for the December FOMC meeting. Any disappointment in the report could add to odds for a 75bps hike.


  • The latest read on fed funds futures has the rate peaking at a 5.00% – 5.25% for early 2023 (see graph below) as the market processes the FOMC rate decision and Powell’s hawkish press conference. The takeaway from Powell’s comments is that they are inclined to risk over-tightening vs. not tightening enough lest inflation reignite, and that combined with his comment that the terminal rate is more than likely higher than the September forecast (4.50 -4.75%) drove most of the repricing.


  • A total of six Fed officials are scheduled to speak this week so we’ll get another dose of opinions over the path and pace to the terminal rate. While we don’t expect a defining of that terminal rate, the market will be attuned for any hints that Fed members think something above the current pricing of 5.00% – 5.25% is likely.


  • The week ends with the University of Michigan preliminary consumer confidence read. The biggest numbers coming from that report these days are the inflation expectations. The forecast is for the 1yr inflation expectation to tick up from 5.0% to 5.1% while the longer term 5yr – 10yr expectation is forecasted to be unchanged at 2.9%. The Fed is sensitive to the longer-term read as they don’t want those expectations to begin marching higher.  The October read did see an increase so the Fed will want to see an unchanged or lower read for this report.


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 5.48 5.66 5.41 5.42 5.50 5.96
0.50 5.47 5.43 5.35 5.31 5.36 5.85
1.00 5.46 5.40 5.32 5.27 5.27 5.72
2.00 5.39 5.26 5.19 5.15 NA
3.00 5.14 5.09 NA
4.00 5.04 NA
5.00 5.00 NA
10.00 NA

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Published: 11/07/22 Author: Thomas R. Fitzgerald