An increase in the CPI for May 2022 to a new high of 8.6% triggered a massive bloodbath this month across almost all asset classes. Because that powered up market expectations of Fed tightening at a faster rate than previously thought. Earlier this year, concerned market participants were pricing in as much as a 0.75% hike in some of the FOMCs this year. But thereafter, US Fed came out to quash this notion by assuring the markets that they were not actively thinking about a hike as high as 0.75%. But with the new CPI number, this not only renewed the fear, it actually sent the rates soaring to new highs.
This is what the Fed Fund Futures imply as of 13 June 2022. It is now pricing in a 0.75% increase in the Fed Funds rate for the coming June FOMC which starts today. But what is notable is it has an implied probability of more than 90%. Now, Fed usually refrains from surprising the market in order not to set off any panic. Of course, the market could turn out to be wrong. However, for the market to price in with such a high certainty when the meeting is just moments away does suggest there is a good likelihood of a 0.75% hike happening.
The yield curve shifted up dramatically this month with the changes in the rate expectations. 2-year yields and beyond and above are now firmly above the 3% territory. And the longer end of the curves flattens back with the 2Y now approaching the 10Y. With a slight push, we will be back with an inverted yield curve.
Anyway, let's watch the outcome. We will know the results soon.