Rates Rally on Quiet Day Ahead of FOMC Meeting Week

Rates down across curve, while 2/10 inversion held firm at yesterday’s levels. 2 and 10 year yields were virtually unchanged today, while rates generally declined across other tenors. Market participants are generally rallying around a 75 bp hike at the upcoming FOMC meeting, however some bets are being made on a 100 bp increase. Given recent inflation reports, Fed hawks looking to front-run hikes may be uniquely emboldened..

Consumers expecting lower inflation are more positive but still uncertain. The University of Michigan Consumer Sentiment Index published today indicated consumers are modestly more positive than before. The index increased to 59.5 vs. 58.2 in August, which may have been due to lower prices at the pump. The report also includes consumer inflation expectations, an important driver of actual inflation. Year-ahead expectations declined from 4.8% to 4.6% and long-run expectations declined to 2.8%, the lowest level since July, 2021. Despite the improvements, uncertainty around inflation expectations increased as consumers still remain wary about the future.

The week ahead. Wednesday’s FOMC meeting is the event to watch. Also monitor Housing Starts released next Tuesday and Initial Jobless Claims on Thursday.