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Hawkish Mester Drives Further Increases In Hike Pricing

FED
  • Mester ('22 voter) notes that prices are only cooling down "if you squint" and in some pockets, with declines concentrated in commodities whilst there are fears that service inflation will be more persistent.
  • She needs to see compelling evidence of sustained or several months that inflation has first peaked (which we haven't even seen yet) and then coming down. "I welcome some cooling in those pockets but can't cry victory too early" about inflation that has been stubborn and is unsustainably high.
  • With questions over the reliability of a technical recession in US GDP after the Q2 contraction, she notes that domestic demand only cooled in Q2 whilst the labor market certainly right now remains very healthy and there's no broad-based pullback in activity across sectors. Similarly, her forecast of below trend growth this year and into next year wouldn't be considered a bad outcome or stagflation; it's necessary for price stability with healthy labor markets.
  • The result is 60bp now priced for the Sept FOMC (+5bps intraday) with gains extending below that with a cumulative 90bp for Nov (+7bps on the day) and 104bps for Dec (+10bps). It sees a peak of 3.41% in Feb'23 (107bps of hikes) before 47bp of cuts through to end-2023, unwinding inversion having been closer to 60bps of cuts early this morning.
Energy BulletsCommoditiesFOMC Calendar Market News
Energy BulletsCommoditiesFOMC Calendar Market News

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