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Fed Implied Rates See Surprisingly Large Increase On Data

STIR
  • Fed implied rates have climbed after the latest round of goldilocks data, with real spending growth showing a solid monthly profile behind yesterday’s Q2 beat (finishing the quarter with real spending +0.4% M/M in June vs 0.3 expected) but softer price/wage pressures.
  • The ECI was clearly softer than expected although the core PCE deflator is more nuanced. It printed just 0.165% M/M for a rare month consistent with the inflation target but it was perhaps stronger than some had expected after yesterday’s Q2 advance seeing as a sizeable downward revision landed back in April.
  • Still, with the ECI being the only ‘new’ information from an overall quarterly perspective, it’s a little surprising to see rates push as high as they have, although they have begun to retrace some of the increase.
  • Near-term meetings hold at +4bp for Sept and a cumulative +9bp to a terminal 5.42% in Nov, but the largest impact is seen later into 2024 with +5-6bps higher through 2H24 and trimming cuts to 51bp from terminal to Jun’24 and 123bp from terminal to Dec’24.

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