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Inflation Breakeven Pullback Continues

US TSYS
  • Today's pullback in inflation breakevens has continued following NY Fed Williams comments about focusing on real rates, the first FOMC member to speak since Wednesday's decision.
  • 5y breakevens are down nearly 7bps at 2.67%, with the last 4.5bps coming post-Williams. This takes them below pre-FOMC levels having risen to 2.78% after Powell's press conference and peaking as high as 2.82% yesterday.
  • The next level to watch is 2.64%, the Dec 15 low immediately after the Fed decision prior to Powell's conference.
  • 10y breakevens are down 5bps to 2.40%, also closing in on pre-FOMC levels.
  • Over a longer period, 5y inflation breakevens have tumbled from a peak of 3.25% in mid-Nov before the Fed indicated more hawkish policy was incoming, but are still elevated compared to the 2.40-2.65% range seen over the summer.
  • Catalysts to get further towards this range could be signs of abating inflation expectations in surveys that incorporate the latest Fed rate path implied by the dots.
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