Mizuho on Latest FOMC - FJElite
Yesterday’s FOMC message was unambiguously hawkish even if rates themselves were left unchanged.
Warsh’s first meeting delivered a much shorter statement, stripped out the old easing bias and shifted the focus back to price stability. The median 2026 dot moved up to around 3.8%, with nine officials looking for at least one hike next year, while Warsh declined to submit a dot of his own and instead signalled a broader rethink of Fed communications, the balance sheet and the framework itself. The meeting is leaving the front end more exposed to incoming data while reducing the market’s confidence that the Fed is still leaning toward cuts. September has now ~20bp of hikes priced, with the market now toying with the idea of another hike in 2027. Markets have pared losses overnight and 10Y UST yields weren’t able to push above 4.50%. Geopolitically wise, the Iran story has turned more constructive for risk sentiment as headlines pointed to the US and Iran signing an interim deal that reopens the Strait of Hormuz and starts a 60-day negotiating period. Regarding USD rates, the Fed-led bearflattening could extend today if claims and Philly Fed data do not materially weaken the growth story. Retail sales already showed domestic demand holding up better than many expected, so the bar for the market to reprice a softer Fed is now higher. On the other hand, a cleaner energy backdrop reduces one of the near-term upside inflation risks just as the Fed turns more hawkish on its reaction function. The market may continue to interpret lower oil as a support to the long end as a hawkish Fed (and strong data) keeps the front end under pressure. We are mindful that USD SOFR 2s10s is close to inversion levels, which could bring some retracement. Another interesting thing to highlight was the swap spread curve, with the front-end becoming less negative on the hawkish Fed but the long end underperforming (more negative) - potentially a function of the spike in rates vol. Besides data, $24bn of 5Y TIPS are on offer and several asset classes’ options expire today (incl. S&P, UST fut.).