Slowing Inflation, Slower Hikes

Rates rise in small reversal of CPI-driven rally. Treasury yields rose modestly across the curve today after Thursday’s remarkable decline. The 2-year yield rose 6bps to 4.40% while the 10-year yield rose 4bps to 3.89%, which erased a small portion of the collapse in yields late last week. Thursday’s CPI print revealed the the first signs of slowing inflation, placing that much more importance on tomorrow’s October PPI figure. Forecasts call for headline PPI to come in at 0.4%.

Federal Reserve Vice Chair Lael Brainard supports a reduction in magnitude of rate hikes. In remarks today, Vice Chair Brainard said that she favors slowing the pace of rate hikes, beginning with a 50bp hike starting in December. Acknowledging the lagged-impact of rates on the economy, she said that it makes sense to follow a “more deliberate and a more data-dependent pace” to bring down inflation over time. Interestingly, she did not explicitly endorse Chair Powell’s nod to a higher terminal rate during his comments after the November FOMC meeting. Given the slowing pace of inflation observed in last week’s CPI print, she mentioned that core PCE, the Fed’s preferred measure of inflation, may also show a reduction. Fed Funds futures currently price in a 50bp hike at December’s FOMC meeting, followed by another hike in February and March.

Day ahead.  Tomorrow is highlighted by the latest PPI data release at 8:30 AM ET.  Fed Governor Cook will speak at 10:00 AM ET, while Fed Vice Chair For Supervision Michael Barr will speak before the Senate.