Hawkish, but for How Long? 

Yields climb as Fed commentary continues to price into markets. Treasury yields rose across a flattening curve today, with the 2-year yield rising ~7bps to 4.52% and the 10-year yield seeing a ~6bp boost to 3.98%. Hawkish Fed sentiment continued to affect bonds, as Boston Fed President Susan Collins stated that there is “more work to do” to tame inflation, adding that the Fed will be able to do so without doing much damage to the employment sector. This week’s activity saw projections rise for the FFE terminal rate, where markets are now pricing in for a peak rate of ~5.07% by June of 2023.

Labor market softening a key indicator that the Fed will cut rates. Amidst great economic uncertainty, economists at major banks agree that the Fed will likely hike rates into early 2023 but have different outlooks on the peak Fed-Funds range and the probability of rate cuts. The labor market will be watched closely as the market tries to predict the pace and intensity of potential loosening, with UBS economists pointing out that historically the Fed has quickly changed its policy stance after job losses are recorded. Bank of America analysts note that in the past 16 rate hiking cycles since 1954, average unemployment when the last Fed hike occurred was 5.7%, while unemployment sat at 3.7% in October. 

Week ahead. The bond market will be closed on Thursday and will close early on Friday (2 PM ET). When you (don’t) need a break from soccer (football?) next week, be sure to stay tuned for FOMC minutes on Wednesday along with commentary from Fed voters Loretta Mester (hawk), Esther George (neutral), and James Bullard (hawk) on Tuesday, which will highlight the week. Also important will be data releases on new home sales, durable goods orders, and the Chicago Fed national activity index.