Thursday’s CPI Should Decide the 25 or 50bps Rate Hike Debate

  • The Treasury curve is lessening a bit this morning as the short-end flirts with unchanged readings while the longer-end is under a bit of selling pressure owing to a rally in risk assets off China reopening chatter, and the prospects of less rate hikes given the positive jobs report and disappointing ISM Services Report from last Friday. The 2yr is yielding 4.24%, unchanged on the day while the 10yr is yielding 3.58% off 5/32nds in price.


  • The afterglow of the Goldilocks jobs report continues to shine on the market this morning, but the next test will be Thursday’s release of the December CPI Report. Expectations are for it to be a friendly report with no change in overall CPI for the month, but the YoY is expected to dip from 7.1% to 6.5% as crooked numbers from last year roll off the calculation. Core CPI is expected to increase 0.3% for the month, which is above November’s 0.2%, but the YoY is forecast to fall from 6.0% to 5.7% as, once again, some large prints from last year fall out.


  • An as expected inflation report, coupled with the jobs and ISM Services report, should set the Fed on a course to hike the funds rate by 25bps at the February 1 meeting, while something a bit hotter will keep a 50bps hike in the discussion.


  • The market took the friendly jobs report with its slowing wage gains and recast fed funds expectations for this year. As shown in the graph below the terminal rate is once again below 5% with around 50bps of rate cuts priced in by year-end.


  • Fed Chair Powell, and a handful of other Fed members. will have opportunities to push back on that fed funds outlook this week with various public speaking engagements. Powell will address central bank independence tomorrow in an address at Sweden’s central bank, so maybe not the topic nor the venue for taking our fed funds futures to task but given the speech will be from Europe the headlines should come early. St. Louis Fed President speaks on the US economy and monetary policy Thursday after the CPI release so expect some headlines to arise from that address.



Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 5.09 4.88 4.83 4.82 4.91 5.37
0.50 5.08 4.86 4.77 4.71 4.77 5.26
1.00 5.07 4.82 4.73 4.67 4.68 5.13
2.00 4.81 4.68 4.59 4.56 NA
3.00 4.54 4.50 NA
4.00 4.45 NA
5.00 4.42 NA
10.00 NA

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Published: 01/09/23 Author: Thomas R. Fitzgerald