Bond yields fell sharply early Tuesday as the Treasury market reopened after an extended weekend and traders priced in signs the Federal Reserve may not raise rates again in this cycle.Thank you for reading this post, don't forget to subscribe!
What’s driving markets
Treasury trading returned after a long weekend with some catching up to do. The cash market was shut on Monday for the Columbus and Indigenous Peoples holiday. But Treasury futures rose 0.5% on Monday as investors absorbed the outbreak of war between Israel and Hamas, and comments deemed a bit more dovish from Fed officials.
Fed Vice Chair Philip Jefferson said on Monday the central bank could “proceed carefully” following the recent surge in Treasury yields to fresh 16-year highs, and Dallas Fed President Lorie Logan said the surge in long-term rates may mean less need for additional increases in borrowing costs.
Treasury futures are down 0.2% on Tuesday, but that still leaves benchmark yields in the reopened cash market sharply lower from Friday’s close.
The retreat in yields will be put to the test in coming days, with the producer and consumer prices data released on Wednesday and Thursday, respectively.
Until then, markets are pricing in an 86% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on November 1, according to the CME FedWatch tool.
The chances of a 25 basis point rate hike to a range of 5.50 to 5.75% at the subsequent meeting in December is priced at 25%, down from 40% a week ago.
The central bank is not expected to take its Fed funds rate target back down to around 5% until August 2024, according to 30-day Fed Funds futures.
U.S. economic updates set for release on Tuesday include the August wholesale inventories, due at 10 a.m. Eastern.
The New York Fed will publish its survey of consumer expectations, including views on inflation, at 11 a.m. and indeed there are also a number of Fed officials making official appearances and speeches on Tuesday.
Raphael Bostic, president of the Atlanta Fed takes part in a moderated conversation starting at 9:30 a.m.; Fed Gov. Christopher Waller speaks at George Mason University at 1 p.m.; Neel Kashkari, president of the Minneapolis Fed, appears in Minot, North Dakota at 3 p.m.; and Mary Daly, president of the San Francisco Fed, appears at a town hall event at 6 p.m.
The Treasury will auction $46 billion of 3-year bonds at 1 p.m..
What are analysts saying
“The last CPI report arrives on Thursday, before the penultimate FOMC meeting of the year at the start of next month,” said Jamie Dutta, market analyst at Vantage, the online broker. “Crucial for policymakers will be the core month-on-month data. This has averaged 0.2% over the last three months and has offered strong encouragement to markets that the disinflation process is in full swing.”
“But questions are being raised about whether this is the fourth ‘soft patch’ before another upturn in price pressures, rather than something longer lasting. Last Friday’s blowout jobs report and spiking oil prices could influence the headline figures and underlying price growth in the months ahead,” Dutta added.
“An upside surprise in the CPI data will cause markets to readjust their bets on the chances of another rate hike this year,” he concluded.
Source : marketwatch.com