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Weaker Rates Discount Rising UofM Sentiment, Lower 1Y Inflation Exp

US TSYS
  • Treasury futures remain weaker, but off morning lows after futures inexplicably reversed a post UofM sentiment data rally, front month 10Y futures slipped to 112-24.5 low, trades above technical support (112-12+, Low Jun 14) at 113-00, yield 3.7730% +.0565.
  • No particular headline driver for the reversal as it appeared FI longs took the post UofM rally (sentiment 63.9 vs. 60.0 est, 59.2 prior while 1Y inflation exp falls to 3.3% vs. 4.1% est) as an opportunity to scale back risk ahead the long holiday weekend.
  • The 2s10s curve tapped -98.341 low, lowest since March 8 43 year inverted low of appr -110.0, this as short end rates price in projected 25bp hike in one of the next 3 FOMC meets.
  • Chances of a 25bp hike next at the July 26 FOMC is approximately 70% with Fed funds implied at 17.6bp. Probability of a 25bp hike over the two meetings that follow remain above 80%: September cumulative at +21.3bp to 5.293%, November cumulative 20.3bp to 5.282%. while December cumulative holds at 11.8bp to 5.197%. At the moment, Fed terminal at 5.290% in Oct'23.
  • Mixed policy opinions with the Fed out of blackout: Slowing the pace of interest rate increases gives the Fed more time to assess data, and the Fed can "do more" if slowing demand isn't translating into lower inflation, Richmond Fed Barkin said Friday.
  • Conversely, the Federal Reserve must raise interest rates a lot more in order to bring inflation back to target and this week's pause was misguided given stubborn prices, former Richmond Fed President Jeffrey Lacker told MNI earlier.
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