Peak Policy Rate Remains Uncertain Ahead of PCE Data

Rates quiet ahead of upcoming PCE data. Swap rates and UST yields were little changed ahead of PCE (Thursday and Friday), as the 2y yield declined less than 1bp and the 10y yield rose less than 1bp to 5.12% and 4.54%, respectively. Fed President Kashkari headlined an otherwise quiet session when he said that he expects another hike in 2023 and assigned a 40% probability to a scenario where the federal funds rate will be pushed “potentially meaningfully higher.” Meanwhile, a $48b auction of 2y notes was awarded at 5.085%, the highest since 2006. 

Consumer confidence declines. Today’s data releases included the Conference Board’s September consumer confidence reading, which slid to a 4-month low coming in below estimates (103.0 actual vs. 105.5 est.) and August’s revised figures (108.7). While the gauge of current conditions increased slightly, a measure of consumer’s 6-month forward expectations declined. The decline was driven by a worse outlook for the economy and labor markets – workers are more concerned about their personal finances and employment prospects.

Jamie Dimon warns of 7% Fed Funds. JPMorgan CEO Dimon warned that interest rates could peak as high as 7%, a scenario that he feels the world is ill-prepared for. He commented, “The worst case is 7% with stagflation. If they are going to have lower volumes and higher rates, there will be stress in the system.” He added that an incremental 200bps of hikes would cause more pain than previous hikes, though Fed Funds futures suggest only a ~4% chance of a climb to 6% by the end of 2023.