The Weekly Beat: 1 August 2023

An overconfident market, second chances in soybeans, and more!

U.S. Bond Market

·   The market took away a surprisingly hawkish message from the July FOMC meeting, as discussed in last week’s note.  In the Treasury market, the back end of the yield curve sat up, and there is even some daylight visible between 3-month rate and the market’s expectations for a terminal rate of five and a half percent.  Watch for rapid steepening as the Fed begins to cut rates (Charts 1-3).

·   Action in two-year rates implies a high degree of market confidence about the future path of monetary policy, with the weekly true range back down to the magic 10 basis point range (Charts 4-5).  That makes the extremely large short position taken by large speculators all the more surprising and presents an attractive opportunity to fade the market with a built-in exit (Chart 6).