USD Rates: Data flow and neutral rate

Balanced view needed.
Group Research25 May 2022
    Photo credit: Unsplash Photo

    US Treasuries had a relatively muted session following the release of Fed minutes last night with 10Y yields hovering around 2.75%. Shorter-term rates pared Fed bets a tad, pricing in just a shade over seven hikes (175bps) through the rest of the year. There was nothing new to add from a policy perspective. The minutes reinforced views that the next two meetings would be delivered in 50bps clips, but the path thereafter is less certain. The immediate target is neutral, which Fed Chair Powell pegged to be in the 2-3% range. Note that the dotplot indicated neutral at 2.5% while our own estimates peg at 2.75% for the longer term. There was also discussion on MBS sales, which will be flagged in advance.

    We think that the inflation and Fed tightening narrative has played out sufficiently for now. Data dependency is perhaps more important at this stage of market pricing and economic cycle. The focus had largely been on the path of inflation and that continues to be a key theme. If price pressures do moderate into an annualized 3-4% pace, there could be scope for the Fed to downshift into 25bps increment later this year (our core view). Increasingly, there are also concerns that the US economy might slow more than anticipated. We think these risks are likely premature but could feature more prominently well into 2023. In any case, growth worries have become more prominent and a more balanced view on USD rates is appropriate. 

    Eugene Leow

    Senior Rates Strategist - G3 & Asia
    [email protected]
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