Choppy Day Leaves Rates Near YTD Highs Ahead of FOMC

Volatile day ends with rates little changed as market awaits FOMC. Swap rates and Treasury yields looked poised to pull back after yesterday’s sharp sell-off, but quickly reversed an initial decline to end the day marginally higher across a steeper curve. The 10-year Treasury yield traded in a 7bp range and fell as low as 2.07% before ending the day back near post-pandemic highs at 2.14%. The big move of the day came in crude oil as the commodity pulled back nearly 8% to close back below $100/barrel.

Previewing the FOMC meeting. A rate hike tomorrow seems all but assured, Fed Funds futures pricing in a 100% likelihood of a single 25bp rate hike and a 15% likelihood of a 50bp hike. Of greater importance will be Fed Chair Powell’s signaling around the central bank’s plans of quantitative tightening. The impact of quantitative tightening could be even greater than that of an outright rate hike, and the Fed’s expected pace of balance sheet runoff is expected to be triple that of the last cycle ($100B vs. 50B). The FOMC will make its policy rate announcement at 2:00 PM ET, with an updated “Dot Plot” and press conference to follow.

Producer prices increase 10% from prior year. Producer prices rose 10% from a year prior, yet another indication of the dire state of inflation. Despite the headline number, core PPI inflation came in well below estimates, logging a 0.20% gain vs. forecasts that had called for a 0.2% increase.