US | The yield curve is signaling a patient and data-driven Fed amid still high inflation

Summary

While the labor market is still on track to a better supply-demand balance and wage costs cool down, two consecutive 0.4% MoM core inflation readings will likely continue to push the Fed to convey it needs “more good data” to gain greater confidence on the disinflationary process.

Key points

• Key points:
• Mid- and long-term yields have reversed 1/3 of the previous rally as markets try to reconcile shelter inflation stickiness and newly-signed rents pointing to significant disinflation.
• Last week’s less-hawkish-than-expected Powell’s comments before Congress prevented the yield curve from pricing in a more pessimistic outlook.
• With a still-restrictive policy stance and a better balance of risks, the Fed’s decisions going forward will likely gradually focus on avoiding causing unnecessary harm to the labor market.
• The housing market continues to be the most sensitive to high rates, while the investment- grade bond market appears to remain immune to the steepest hiking cycle in decades.
• Markets have all but priced in the Fed’s median outlook from last December of no more than three rate cuts this year, giving Powell leeway to avoid an overly hawkish tone next week.

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