July Fed Hike Odds Rise to 8bp Amid Oil Price Tensions
Market expectations for a July Federal Reserve rate hike have increased significantly in recent days, rising alongside higher oil prices and US-Iran tensions. However, TD Securities' Gennadiy Goldberg and Molly Brooks believe that current pricing is excessive and unlikely to materialize.
The analysts note that the correlation between market expectations for rate hikes and oil prices has been consistent, but it temporarily broke after weaker CPI and PPI readings. Nevertheless, they expect markets to become increasingly concerned about energy shocks and their potential impact on inflation and monetary policy.
Goldberg and Brooks maintain a receive July OIS position in their model portfolio, suggesting that they believe the market is overpricing the likelihood of a rate hike next week. They also highlight significant risk for rate hikes later this year, but consider current pricing to be extreme.