10-year T-note yields tumbled Tuesday after U.S. consumer prices in October fell more than expected, bolstering speculation the Fed was finished with its rate hike cycle and may even cut interest rates in early 2024. U.S. Oct CPI eased to +3.2% y/y from +3.7% y/y in Sep, better than expectations of +3.3% y/y. Also, Oct CPI ex-food and energy eased to +4.0% y/y from +4.1% y/y in Sep, better than expectations of no change at 4.1% y/y and the smallest increase in over two years.
The 10-year T-note yield fell to a 1-3/4 month low today at 4.424%, a sharp reversal from the surge in the 10-year T-note yield last month to a 16-year high of 5.019%. The easing price pressures removed the chances of a Fed rate hike this year and accelerated the timing of a Fed rate cut in 2024. The markets are now pricing in more than 50 bp of rate cuts by July of next year, about double the amount anticipated at the end of last month. Schroders Plc said, “It doesn’t matter now what the Fed says about holding rates higher for longer. It’s likely to start a gradual easing cycle in the first half of 2024.”
With the easing price pressures, the markets are discounting a 0% chance for a +25 bp rate hike at the next FOMC meeting on Dec 12-13 FOMC and a 0% chance for that +25 bp rate hike at the following FOMC meeting on Jan 30-31, 2024. The markets are then discounting a +28% chance for a -25 bp rate cut at the March 19-20, 2024, FOMC meeting and a 76% chance for that same -25 bp rate cut at the Apr 30-May 1, 2024, FOMC meeting.
Some analysts believe inflation is no longer the problem and that deflation risks have increased. Bank of America said Tuesday that the Federal Reserve is done raising interest rates, and Ark Investment Management’s Cathie Wood said deflation is already underway in industries across the U.S. However, some warn that the Fed risks hurting its reputation if it cuts interest rates too quickly. Citadel founder Ken Griffin said the Federal Reserve “risks losing credibility around their commitment to a 2% inflation target” if they cut rates too soon.
With core inflation in the U.S. currently at 4.0%, twice the Fed’s 2% target, policymakers will be under pressure to keep interest rates at current levels for the time being. Bloomberg Intelligence said sticky core prices “means the Fed is likely to keep interest rates higher for longer than many bond investors expect. Those betting on rate cuts by the middle of next year are likely to be wrong.” Also, Pacific Investment Management said, “Inflation will take time to come down, and that will leave the Fed on hold longer than you typically see during a cycle,” and it will wait “to make sure that the data continues to confirm that inflation will fall.”
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
