Godlman Sachs on US - FJElite

Over the last week and a half, duration has been able to recalibrate ahead of critical inflation data next week, and build in some risk premium for a slightly less stable situation in the Middle East. At 44 bps priced through March 2027, the front end has moved enough to reflect hike risk shown in June s dot plot, and the cheapening of the belly has left 5y yields at local highs around 4.32%.

While Warsh emphasized a focus on price stability at the June meeting, he touted improved inflation expectations a few weeks later at Sintra. Taking credit for progress on inflation without hiking implies a preference not to hike. With July meeting pricing 7 bps, we think it would take a clear beat on next week's data for a hike later this month Pricing is all the more important given Warsh’s comment at the June press conference: “Financial market prices are probably the most important source of information to guide central bankers." And despite recent instability in the Middle East, oil prices still sit at fairly low levels that should not have spillover effects.

From here, we think the most likely path is a modest rally and a slightly steeper curve if we get an in line round of inflation data.