Yet Another Hike on the Way?

June hike bets push rates higher. Swap rates and Treasury yields rose across the curve today after Fed commentary and economic data fueled bets for a rate hike in June. A beat in Philadelphia manufacturing and miss in initial jobless claims and continuing claims were among the data to push rates higher. Futures now suggest a ~33% chance of a 25bp hike at the upcoming FOMC meeting, a stark contrast from just two weeks ago, where a cut was priced in as more likely than a hike. The sentiment pushed the 2-year yield to 4.25%, nearly a month-long peak. The 10-year yield climbed 8bps to 3.65%. 

Fed consensus fracturing despite expected revision to economic outlook. Today’s Fed speak indicated a rapidly dividing policy outlook, even as analysts expect Fed officials to deliver their biggest upward revision to the US economic outlook since 2021. Fed Governor Jefferson communicated a dovish case today, but Dallas Fed Chief Lorie Logan said that she is not ready to pivot. Her solution was to “skip” a rate decision at next month’s meeting, but she said that “as of today, though, we aren’t there yet,” due to elevated core inflation. Even if the Fed decides to hold rates in June, Fed President Bostic said that it doesn’t mean the Fed has fully pivoted given continued economic uncertainty. These comments show a fraying of the hawkish consensus generally maintained by Fed officials over the past year. Despite the tone shift, continued inflation, robust job growth, auto sales at a 2-year high, and the highest new home sales data in a year are being pointed to as signs that the Fed will need to continue to hike rates.

Day ahead. Fed speak will be the highlight, with Chair Powell, John Williams, and Michelle Bowman set to make public comments. Powell will deliver his speech at 11 AM.