The terminal rate has increased to 3.56%, up from 3.44%, and the market’s expectations of further policy easing have decreased to below 90bp from the 2024 interest rate peak.[0] Real rates, as indicated by financial conditions, have been higher than usual since December.[0] Economists have speculated that, if the European Central Bank (ECB) continues to increase the deposit facility rate by 25 basis points at each meeting after March, the rate would reach 3.5% by June.[0] The market has gone further than that, however, the US developments have aided the hawks and it is unlikely they would have accomplished this on their own.[0]
High beta fixed-income markets, which are not as highly rated as their peers, are still having their moment of glory.[1] In 2022, the expectation of stricter monetary policy caused stocks to decrease and credit spreads to widen, which is greatly different from the present.[2] In theory, the current rise in base interest rates due to improved economic growth is the appropriate type of monetary policy.[1] Lorie Logan of the Dallas Fed stated that interest rates may need to be increased if there are shifts in the economy, or if lending conditions become too relaxed.[2] The Federal Reserve would increase interest rates in order to control economic growth and/or stabilize financial markets.[2] It appears that Goldilocks has been shouldering market sentiment since the start of the year.[2]
The remarks of the individuals matched a higher than expected US Producer Price Index (PPI) from January, consequently leading to a 6-7 basis point rise in 10-year US Treasury yields.[3] At 3.89%, the US 10-year yield is now the highest since November.[4] The higher rates for longer thesis has also seen some substantial re-pricing of the Fed curve this month where market pricing for the December 2023 Fed Funds rate has risen to 5.10% from 4.35%.[4]
Two weeks ago, markets anticipated one more rate hike and two cuts for the year, but now they are predicting the possibility of four rate hikes this year, representing a major change.[5] In a span of only two weeks, the yield of the two-year U.S. Treasury has gone up from 4[5] The 10 year yield rate is now at 3.9%, which is the highest it has been since November, after having been at 3.4% at the beginning of February[0] December 2023 Fed Funds implied rate has risen to 5.10% from 4.35%.[5]
0. “Rates Spark: Crucial Levels Ahead | MENAFN.COM” MENAFN.COM, 16 Feb. 2023, https://menafn.com/1105583870/Rates-Spark-Crucial-Levels-Ahead
1. “Rates Spark: Higher For Longer Hits Selectively, For Now” MENAFN.COM, 15 Feb. 2023, https://menafn.com/1105576839/Rates-Spark-Higher-For-Longer-Hits-Selectively-For-Now
2. “Rates Spark: Higher for Longer Hits Selectively, for Now” Investing.com, 15 Feb. 2023, https://www.investing.com/analysis/rates-spark-higher-for-longer-hits-selectively-for-now-200635366
3. “FX Daily: Hawks In The Ascendancy | MENAFN.COM” MENAFN.COM, 17 Feb. 2023, https://menafn.com/1105590982/FX-Daily-Hawks-In-The-Ascendancy
4. “FX Daily: Hawks in the ascendancy” ING Think, 17 Feb. 2023, https://think.ing.com/articles/fx-daily-hawks-in-the-ascendancy
5. “Fed hawks circle” FXStreet, 17 Feb. 2023, https://www.fxstreet.com/analysis/fed-hawks-circle-202302170900