Rates Fall Ahead of Inflation Data

Treasurys rally as midterm elections conclude. Swap rates and Treasury yields fell across a steepening curve, the 2-year yield decreasing ~7bps to 4.58% while the 10-year yield fell ~3bps to 4.09%. The rally comes after the Democratic party performed better than expected in the midterm elections, avoiding a full-fledged “red wave.” With Republicans likely to take control of at least one chamber, attention now turns towards another crucial presidential campaign in two years’ time.

CPI data looms large as market looks for evidence of policy tightening. Forecasts call for a 0.6% MoM increase in headline CPI vs. 0.4% in September, and a 0.4% – 0.5% MoM increase in core CPI vs. 0.6% in September. Importantly, on a YoY basis, CPI is expected to decelerate to 7.9% from 8.2%, and core CPI to land at 6.5% vs. 6.6%. Economists expect slight increases in food and energy prices and hot housing and shelter inflation, partially offset by a decline in used car prices, airfare and health insurance costs. A meaningful deceleration in inflation could give the Fed cover for a smaller 50bp hike at its December meeting. 

Day ahead. CPI data will kick off the day at 8:30 AM ET. Fed voters will make public comments throughout the day, including Loretta Mester (hawk), John Williams (hawk), Christopher Waller (hawk) and Esther George (neutral).