Overview
In the wake of upcoming U.S. consumer and factory gate inflation reports, bond yields have experienced a slight decline. The data, set to be released in the next few days, has captured the attention of investors.
Key Details
- The yield on the 2-year Treasury (BX:TMUBMUSD02Y) remained relatively stable at 4.762%. It is important to note that yields move in the opposite direction to prices.
- The yield on the 10-year Treasury (BX:TMUBMUSD10Y) decreased by 1.6 basis points to 4.017%.
- The yield on the 30-year Treasury (BX:TMUBMUSD30Y) witnessed a decline of 1.8 basis points, settling at 4.193%.
Market Drivers
Traders are closely monitoring the approaching inflation data, which has led to minimal activity in the Treasurys market. Of particular importance is the consumer prices report for July, scheduled for release on Thursday, as well as the July producers prices data, which will follow on Friday.
The Federal Reserve’s decision-making process regarding headline inflation, specifically their efforts to keep it at a 2% target, will likely be influenced by these upcoming reports.
Notably, news from China has also contributed to the decrease in yields. Consumer prices in China experienced a decline of 0.3% in July, marking the first instance of deflation in over two years. Additionally, factory gate prices fell by 4.4%.
Market Expectations
Market analysis indicates an 87% probability that the Federal Reserve will maintain current interest rates at a range of 5.25% to 5.50% following its next meeting on September 20. This projection is based on the CME FedWatch tool.
Fed Watch: Rate Hike Predictions and Economic Outlook
According to 30-day Fed Funds futures, there is a 28% chance of a 25 basis point rate hike at the next meeting in November. Analysts do not expect the central bank to bring the Fed funds rate target back down to around 5% until May 2024.
No significant U.S. economic updates are expected on Wednesday, but the Treasury will hold an auction for $38 billion of 10-year notes at 1 p.m. Eastern.
Insights from Analysts
In a recent note, the ‘Fed Watcher’ analyst team at Deutsche Bank examined recent comments made by central bank officials. They noted that officials agree that the decision at the September meeting would be heavily influenced by data. With risks becoming more balanced, Fed officials are starting to shift their focus towards how long they should maintain rates at restrictive levels.
The Deutsche Bank team stated, “These comments align with our analysis that explores the implications of different economic scenarios on the timing and pace of rate cuts. Our findings suggest that, in most scenarios, the Fed is likely to start cutting rates in the first half of 2024. Substantial rate reductions could then follow throughout the rest of the year.”