Ten-year Treasury yields inch off latest lows ahead of Fed’s favored inflation data

Treasury yields rose slightly early Thursday, but remained just above their lowest levels since mid-September as traders awaited the PCE inflation report.

What’s happening

  • The yield on the 2-year Treasury
    slipped by 2.5 basis points to 4.651%. Yields move in the opposite direction to prices.

  • The yield on the 10-year Treasury
    rose 3.3 basis points to 4.297%.

  • The yield on the 30-year Treasury
    gained 3.4 basis points to 4.477%.

What’s driving markets

Ten-year Treasury yields have fallen from a 16-year high just above 5% in October, to around 4.3% amid hopes easing inflation will allow the Federal Reserve to start cutting interest rates by the spring of 2024.

The narrative of cooling price pressures in developed economies was supported early Thursday, when a report showed annual eurozone inflation falling to 2.4% in November, the slowest pace since August 2021.

Next it’s the the turn of the U.S., in the form of the personal consumption expenditure price index for October, considered one of the Federal Reserve’s favored inflation gauges, which is due for release at 8:30 am. Eastern.

Economists expect the U.S. core PCE index, which strips out more volatile price items such as food and energy, to have risen by 0.2% month-on-month, the same as September’s reading, and for the annual rate to dip from 3.7% to 3.5%, which would be the lowest since July 2021.

Other U.S. economic updates set for release on Thursday include the weekly initial jobless claims at 8:30 a.m., the Chicago Business Barometer for November at 9:45 a.m., and October pending home sales at 10 a.m.

New York Fed President John Williams is due to speak on the importance of innovation in central banking at 9:15 a.m.

Ahead of all that, markets are pricing in a 96% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on December 13th, and a 92% chance it will do the same at the January meeting. according to the CME FedWatch tool.

The chances of at least a 25 basis point rate cut at the subsequent March meeting is 45%, up from 12% a month ago.

What are analysts saying

“Recent data has tended to indicate some cooling of the [U.S.} economy without tipping the balance, with softer numbers coming from retail sales, job growth and the unemployment rate,” said Richard Hunter, head of markets at Interactive Investor.

“The base case for investors remains that the hiking cycle is complete, although there is still some light between the consensus of rate cuts towards the middle of next year and the Fed’s own mantra of higher for longer,” Hunter added.

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