• Key events today include Fed Chair Powell’s biannual testimony before Congress; the Fed’s Beige Book; the Bank of Canada rate decision; and a lone ECB-speaker. The only data report worth mentioning here are the PPI figures for June. Regarding the BOC, the central bank could decide to taper bond purchases by a billion CAD or so from the current CAD3 billion. And regarding Powell, instead of discussing the titbits of his testimony – will he say this or that – we want to use the occasion to dissect pricing for the federal funds rate once again.
  • In our March 31 Comment we used a simple Taylor rule model to deduce from USD OIS forward pricing expectations for core inflation and unemployment. We interpreted the curve as having priced in a very bullish economic scenario. In fact, OIS pricing for 2023 – the endpoint for FOMC and sell-side forecasts – vindicated the most hawkish of forecasts. Think of unemployment of 3.0% and core inflation of 2.5%. In other words: a red-hot economy. We concluded that all the good news was priced in. Our call turned out to be half right. Forwards of three years or further out the curve have either collapsed or come down strongly. Hence the rally in the 10y and 30y Treasury bonds. But rates less far out the forward curve have increased strongly since late March. And the increases for these forward periods have been vindicated by the Fed’s hawkish pivot at the June FOMC meeting. Which begs the question: what’s priced in now?


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