Credit Ágrcole: Fed's Warsh - FJElite
- Fed Chair Kevin Warsh did not tip his hand during the three-hour testimony before the House Financial Services Committee yesterday. A key message was that the FOMC has “no tolerance for persistently elevated inflation”.
- Rates investors took comfort in the Fed’s commitment to price stability. Treasuries kept earlier gains from the weaker-than-expected June CPI report and reversed some Fed tightening premium over the coming months.
- In reference to the June CPI print, Warsh acknowledged progress but downplayed the data, emphasising no cherry-picking and plenty of work ahead.
- Market participants will focus on June PPI data today, which along with CPI, will provide economists with a better estimate for PCE, the Fed’s preferred inflation metric, set to be released on 30 July.
- The Fed’s semi-annual monetary policy report described the labour market as broadly stable and productivity strong, with a low unemployment rate, few layoffs and solid wage growth.
- In rates direction, we expect data and Iran headlines to drive Treasuries near-term. Rates have upside on strong data and rising energy prices, and vice versa. The 10Y yield has hit our Q326 forecast target.
- We maintain a flattening bias, as front-end rates are biased higher if data is strong and oil prices increase. We recommend Treasury 10-30Y flattened as the curve looks too steep vs 5-30Y. Middle East tensions will likely re-ignite inflation worries, potentially flattening the curve.