Goldman: Bear Flattening Of Curve Resumes, But Unlikely To Last

Goldman Sachs think the “roughly 40% odds of a 75bp hike remaining in December FOMC OIS are still somewhat high given the Fed’s rationale for the (potential future) step down (in the pace of rate hikes) was not particularly data dependent. “

• “This week’s CPI report offers another data point on whether markets are internalizing the Fed’s message; if markets respond to an upside surprise by reverting to front loading, we would be inclined to fade such a move.”
• “Beyond the narrow considerations for December FOMC pricing, we expect the upward terminal rate repricing to stick. Benchmark 10-Year Tsy yields have only partially followed the terminal rate higher, though we believe there are upside risks on this front both vis-à-vis our forecasts and current market pricing.”
• “At a slower pace, the Fed will have the opportunity and time to at least partially observe the cumulative effects of its tightening program. At the long end, we had noted that a lower rate volatility environment, which the Fed’s downshift in the pace of hikes is likely to correspond to, implies more steepness in curves; indeed, although the 10s30s curve has flattened from the highs recently, unlike the 2s10s, it remains above the lows set in September.”