Fed Chair Powell Joins Hawkish Sweepstakes

  • We mentioned earlier that it seems each Fed official is trying to out-hawk the other and Fed Chair Powell has joined that competition.

 

  • He mentioned yesterday in an IMF panel discussion that a 50bps rate hike is certainly on the table for May and that additional 50bps hikes are a possibility so as to “front load” some of the removal of policy accommodation.

 

  • While hawkish rhetoric coming from Fed officials is pretty much a given these days, Powell’s suggestion that the Fed could be embarking on a series of 50bps hikes sent investors repricing expectations for year-end fed funds from 2.50% to 2.75%.

 

  • The comments also sent short and intermediate Treasury yields higher with the 5yr note the latest to break the 3.00% barrier.

 

  • The 10yr note, meanwhile, backed up to 2.98% before dipping lower and currently sits at 2.93%. It seems inevitable that the 10yr will too reach 3.00% but so far dip buyers are stepping in as it approaches that level.

 

  • In preparing an economic presentation for an upcoming conference, we noted several major inflation components starting to plateau, if not beginning to roll over. Used cars, oil, and wheat all displayed this pattern. Although it’s very early, and obviously they can turn up at any time (especially wheat and oil given the Ukraine war), it does feed into the argument that we may have already seen peak inflation for this cycle.

 

  • That possibility hasn’t really factored into inflation breakeven rates in the TIPs market yet, but the five year breakeven has the beginnings of  a plateau to it, but it’s early days for sure (see graph below). In any event, as talk of 50bps hikes for as far as the eye can see gathers force, watch how the TIPs market reacts because if inflation expectations start to ebb, longer-end yields will have a harder time climbing from here.
Source: Bloomberg

 

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 2.76 3.00 3.10 3.26 3.44 3.90
0.50 2.75 2.97 3.04 3.15 3.29 3.78
1.00 2.74 2.94 3.01 3.11 3.20 3.66
2.00 2.92 2.95 3.03 3.09 NA
3.00 2.98 3.02 NA
4.00 2.98 NA
5.00 2.94 NA
10.00 NA

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Tags: Published: 04/22/22 by Thomas R. Fitzgerald