Geopolitical Tensions Spur Severe Rate Rally

Fed commentary and geopolitics drive rates lower. Yields declined ~4bps – 15bps across the curve today following geopolitical tensions in the Middle East and a speech from the Fed’s Bostic, who said that rates may already be high enough to curb inflation. Fed Funds futures now show a ~31% chance of a hike by December, a reversal from last week’s ~52%. Equities also rallied today, with major indices up 0.40% – 0.60%. Oil continued its recent decline, with WTI crude down ~0.50% on the day.

PPI awaits. Tomorrow’s PPI is expected to be mixed after August’s elevated levels. Despite concerns about rising energy costs, core PPI is expected to either stay flat or increase, while headline PPI should remain flat or decline. Of the predicted changes, headline MoM PPI should decline from 0.7% to 0.3%, while core YoY PPI should increase to 2.3% from 2.2%. Higher than expected levels could see some reversal of today’s rally, though geopolitical tensions and updates will likely have a more meaningful impact.

Fed President Bostic says rates are high enough. Today, Bostic reiterated that he does not believe rates need to be hiked any further, and that current policy is restrictive enough to bring inflation back to 2%. He was quoted saying, “I actually don’t think we need to increase rates anymore.” He qualified that unexpected changes to the economic outlook could warrant more hikes, but that is not his base case. On the other hand, Minneapolis Fed President Kashkari said that even though long-term yields have surged, he doesn’t think it will be enough to supplant further policy rate hikes to control inflation.