The Fed elected to cut rates by 50 BPS on Wednesday, which came as a surprise to many. Retail Sales data was released on Tuesday and came in stronger than expected, which a lot of experts thought would solidify a 25 BPS cut. Fed Governor Waller actually dissented, which hadn’t happened with a rate cut in roughly 20 years. He was looking for a 25 BPS cut and generally a slower pace of easing. Starting the campaign with a double cut doesn’t necessarily change the general path but rather the timing and pace of which cuts will occur. Perhaps this means the Fed is targeting a higher terminal rate than many expected.
2-year Swaps closed the week completely flat, and 10-year Swaps went up about 10 BPS. This re-steepening of the curve is what the Fed is looking for. Overnight SOFR is at 4.83%, with 1-month SOFR slightly higher. The Fed will look for inflation to be on top of Fed Funds by the end of 2026. The Fed’s brand-new Dot Plot shows 2 more cuts this year, while the markets are pricing in 3. This is beneficial for pricing on both forward starting and spot starting hedges.
Historically, 10-year Treasurys tick up in the short-term during a Fed loosening period but ease over the long term. With this in mind, borrowers that have loans maturing in 2026 (and beyond) can wait to refinance. During previous cutting cycles, the 10-year Treasury has dropped 25 BPS on average from the first cut to the last.
This week will be quieter. A total of $183 Billion of 2-, 5- and 7-year Treasurys will be auctioned off between Tuesday and Thursday. Core PCE numbers will be released on Friday, which will definitely be the most watched macroeconomic data point on the week. Core PCE is actually supposed to tick higher YoY, which is interesting given the circumstances following a rate cut. We’ll also see a nonstop parade of Fed Governors justifying the 50 BPS cut during their speeches throughout the week.
