00:00How much higher could rates go from here? You get 5% on the US 10-year. Why not 6
00:06%?
00:06Why not 7%? Is that the world we're in? Why stop here?
00:10That's a very good question. I would say on the front end I think it's hard to say because
00:16at the end of the day it will depend very much on the Middle East conflict where energy
00:21prices will go. So on that, this is where there is less certainty. When it comes to
00:29the longer part of the curve, let's look at the 5-year, 5-year or longer dated forwards
00:34which are good proxies of term premium, this is where you still have more scope to go.
00:40Especially, let's say, if for example the Fed were to be too slow or not reacting too much,
00:47then that would take over. You would have a repricing of inflation risk premium further out of the curve.
00:55But yes, let's say that from a deficit point of view, you can still have more repricing,
01:00especially in the US. Because to be fair, everyone talks about higher term premium, but it's not like
01:06it's screamingly high. If you plot it against the asset swap supply, it still feels like it's very
01:15rich. Okay, so there's more to go there. Let's talk about the here and now today and what the Fed
01:20is going
01:21to do maybe next week. If we get 0.2 on call today in US inflation, does the Fed hold?
01:29If we get 0.3,
01:30does the Fed hike? Is that what it's coming down to? Because that's what it feels like it's coming
01:35down to. Yes. So we think at 0.2 on call, they go. They go still at 0.2. But
01:42it's a very close call.
01:44Yep. Because for sure, I mean, Waller and Williams have been very dovish. What they've been telling us
01:50is that if there is no signs of inflation building, they would not go. And 0.2 feels a bit
01:57like it.
01:59Or let's say it won't really move the needle. Yeah. But at the same time, we had Walsh,
02:06very clear at Jackson Hole. And I think he's seen that the July FOMC meeting did not look credible
02:12enough for the market. So he really sees that window of opportunity to show credible and suggest that
02:19there will be hikes. So if you don't deliver on that, you can run into a vicious circle.
02:26So I think, and then on top, you had a very strong labour market report. Yeah.
02:31So I think Walsh at Jackson Hole plus a very strong labour market report, which for us suggests that
02:36the unemployment rate will reach 4% at the end of the year, means that the Fed should hike in
02:41September.
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