None of this is rocket science but nonetheless some thoughts
The Fed will cut 25 bps today for obvious reasons
-They have heavily guided that move
-Recent inflation and employment data did not derail that guidance
-Vice Chair Timiraos has not guided us away from that outcome. In fact in today's note he clearly set the path for the move being a done deal... BUT (See below)
-To not cut rates today in light of these facts would look "horribly political"
But the reality is that the RED SWEEP is very much in the realms of probability and there is no reason not to believe that this will result in speedy policy changes on the fiscal and regulatory side.
As we know from the last meeting- What Jay wants, Jay gets. My suspicion (What do I know?) is that looking at all of this Jay will want to temper the fire of a December cut but not totally extinguish it.
That will be enough to further re-adjust December pricing (last around 16.5 bp's ) back to more equilibrium - maybe even 10-15 bp's.
I also think there is a danger that we still see SFRZ5 a bit lower- maybe to 95.97 area (from present 96.165)
That will open up the way for the next (and possibly final) move higher in the 2-year yield.
I doubt we will get anything today that drives it much lower than 4.19%-4.21% and expect that we will move back up to once again test that 4.27-4.28% (50% pullback of the fall from April to Sept this year as well as the pivot level area in the break higher in yields in May 2023) which we have yet to close above.
A close above there opens up the way for a move towards 4.41% which is a decent pivot area including the 200-day MA.
At that point the picture is potentially more neutral at least in the near-term, as it will be hard for the 2-year yield to go much past this UNLESS the market fully prices out December and re-prices the whole curve
All this should support the idea overall that the 2's versus other parts of the curve should continue to steepen overall.
In that respect I increasingly believe that the 109 area on TY1 is pivotal in that respect
