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Inside Markets — Challenge to Consensus

Challenge to Consensus

December 11, 2023

Consensus is looking for headline CPI of 0.0% MoM and 3.1% YoY. A MoM headline CPI print of +0.1% wouldn’t change the YoY estimate for +3.1%.  This probably means the risks are skewed to the upside with a sub-3% YoY rate resulting in lower bond yields lower and higher stock prices.  

The official Fed statement will likely retain a tightening bias with no dissents and no active discussions to ease policy.  The updated Summary of Economic Projections (SEP) will likely include a new median dot of 4.875%, down from 5.125% in September.  The SEP’s core PCE forecast for YE’24 will likely be revised down to 2.5% from 2.6%. At the press conference, Powell will likely try to steer the conversation away from the timing of rate cuts and reiterate that the Committee is only considering whether to hike or hold.

OIS markets are now pricing in 100bp of rate cuts in ’24, which is up 85bp since mid-October.  Catalysts for the repricing included a more market friendly Treasury refunding announcement, signs of easing labor supply in the October Jobs Report and a slightly cooler October CPI print. It’s important to recognize that Treasury issuance is still high by historical standards and the November Jobs Report on Friday points to still-resilient labor markets.  In our opinion, OIS markets were priced below fair value back in mid-October, but are now priced above fair value. This week’s macro catalysts will likely result in near-term mean reversion with ’24 rate cut assumptions falling closer ~70bp.

Two-year yields are now at 4.74% and near key resistance in the 4.80%-4.84% range. An inability to break above 4.84% this week would be a bullish development for 5 and 10-year maturities as well.  

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