US | Market interest rate expectations moved towards Fed's plans amid a run of strong data

Summary

Futures markets now expect a 5.50% peak for the fed funds rate by mid-year, but still anticipate a rapid easing cycle in 2024.

Key points

• Key points:
• The most recent stronger-than-expected payrolls and CPI inflation reports increased investors’ inflation and fed funds rate expectations, driving a parallel upshift in the yield curve.
• The yield curve remains deeply inverted as measured by both the 10y-2y and 10y-3m spreads. Will this along with other leading indicators end up giving a false recession signal? It is unlikely in our view.
• Broad financial conditions indices remain roughly at average levels. Yesterday’s FOMC minutes revealed some members noted that recent easing financial conditions “could necessitate a tighter stance of monetary policy.”
• Professional forecasters revised upwards their expectations for short-term rates in response to the Fed’s higher-for-longer approach. However, the median forecaster revised down its 10-year Treasury yield projections and now expects it won’t exceed 4%, in line with our forecasts.

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