Treasurys Respond to Continued Inflation as Economic Outlook Sours

Treasurys suffer after PCE price index beats forecasts. Swap rates and Treasury yields rose across a flattening curve today, the 2-year yield rising ~14 bps to 4.41% and the 10-year yield rising ~9 bps to 4.01%. The selloff was spurred by the release of price index data, which revealed a 6.2% increase YoY in September, which exceeded the expectation of 6.1%. Largely contributing to the high figure were increases in prices for goods (8.1%), food (11.9%), and energy (20.3%). This will provide the Fed with more reason to opt for larger rate hikes in the future, which explains the Treasury selloff. 

Amidst continued inflation and Fed hawkishness, majority of economists project a recession and believe the Fed is overtightening. A majority of economists surveyed think that a recession is likely over the next 2 years, largely due to what they see as an overly-hawkish Fed. The median economist sets a peak target rate of 4.75%, and 75% believe that there is a greater risk that the Fed will hike too much instead of too little. In addition, most see a hard landing ahead, as opposed to the soft landing the market and policy-makers are generally hoping for in the event that a recession occurs. The full effects of the current policy stance are not expected to be felt until mid-2023, when it will be too late to avoid a recession.

Week ahead. The Fed will make its interest rate decision on Wednesday, where a 75 bp move is the locked-in choice. Nonfarm payrolls and unemployment rate for the month of October will follow on Friday morning.