TD Securities analysts Gennadiy Goldberg and Molly Brooks have raised concerns about current market pricing for a Federal Reserve rate hike in July, noting that expectations for a hike have increased in tandem with rising oil prices and escalating US-Iran tensions [1]. Despite this, the analysts judge a July rate hike as unlikely, describing the current market pricing for the July FOMC meeting as 'excessive' and maintaining a receive July OIS position in their model portfolio [1].
The analysts highlight that if the current pricing persists into the upcoming FOMC decision, it would represent the second-largest deviation between market pricing and actual Fed action in the past decade [1]. They attribute this mispricing partly to the Fed's reluctance to provide forward guidance. The pricing for a July rate hike has recently moved from a low of just 2 basis points to 8 basis points, reflecting increased market anxiety [1].
Goldberg and Brooks note that the correlation between oil prices and rate hike expectations strengthened ahead of the June CPI report but temporarily weakened after softer CPI and PPI readings, which reduced market concerns about energy price pass-through to core inflation [1]. However, they caution that prolonged energy shocks could reignite fears of Fed tightening [1].
Regarding Treasury yields, the analysts observe that Fed and growth expectations have been the main drivers of 10-year yields, which are currently holding in the 4.66-4.69% range. They identify 4.80/81% and 5.00% as the next key resistance levels if yields break higher [1]. Looking ahead, TD Securities sees significant risk of rate hikes later in 2026 but believes the Fed is likely to wait and observe the trajectory of core inflation over the coming months before making any decisions [1].
CONCLUSION
TD Securities believes the market is overpricing the likelihood of a July Fed rate hike, citing excessive expectations driven by oil prices and geopolitical tensions. The firm expects the Fed to remain cautious and monitor inflation data before acting, with the risk of hikes shifting to later in 2026.