Rates Jump on Hike Commentary

Rates push higher ahead of the holiday weekend. Swap rates and Treasury yields rose across a flattening curve today after Fed members Christopher Waller and Thomas Barkin hinted that several additional rate hikes may be needed to slow inflation. The 2-year yield rose 7bps to 4.71% while the 10-year yield closed 4bps higher at 3.76%. Futures are currently pricing in a ~72% probability of a 25bp hike at the July FOMC meeting and a ~93% chance of at least one 25bp hike by the end of the September meeting. 

Today’s Fed speakers echo hawkish commentary from Powell press conference. Following this week’s Fed meeting, Chair Powell made it clear to markets that this month’s pause was not a pivot. His comments were backed by a hawkish dot plot that shows most committee members expect another 50bps of hiking this year. Today’s Fed speakers reiterated the sentiment; Governor Waller said that the Fed may need to hike rates further to ease price pressures in sectors that continue to run hot. He pointed out that even though headline inflation has halved since last year’s peak during this cycle, prices excluding food and energy have barely changed over the last 8-9 months. Richmond Fed President Barkin said that inflation has remained “too high,” and was “stubbornly persistent.” He noted that he still needs to be convinced that slowing demand will return inflation to target quickly, and warned about the consequences of loosening policy prematurely, which could require more aggressive tightening down the road.

Week ahead. Next week will be headlined by Fed commentary, including Chair Powell’s testimony on Wednesday and Thursday. Building permits data on Tuesday and manufacturing figures on Thursday will highlight a relatively sparse data schedule. The swap and bond market will be fully closed on Monday in observance of Juneteenth.