Bond yields fell early Thursday ahead of an important batch of economic data in the next few sessions that may color the Federal Reserve’s policy debate when it meets next week.
What’s happening
The yield on the 2-year Treasury
BX:TMUBMUSD02Y
fell by 1.6 basis points to 4.381%. Yields move in the opposite direction to prices.
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
dipped 1 basis point to 4.172%.
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
eased by 1.1 basis points to 4.399%.
What’s driving markets
Traders will be eyeing a pick up in U.S. economic data in the last two sessions of the week, sensitive to whether they may challenge the market’s current consensus that the Fed can start cutting interest rates in coming months as inflation eases and the economy avoids a recession.
The fourth-quarter GDP report will be released on Thursday at 8:30 a.m. Eastern, with economists expecting annualized growth of 2%, down from 4.9% in the third quarter.
“The economy for the year likely advanced by 2¾% to 3% over the four quarters of 2023, a far cry from the widespread calls a year ago for an imminent recession,” said Stephen Stanley, chief U.S. economist at Santander.
“Looking ahead to 2024, the consumer appears to be in good shape for now, but the pace of increase in household spending may slow as the labor market continues to cool over the course of the year…For the year as a whole, however, my projection of 1.4% (Q4/Q4) real GDP growth is only modestly above consensus,” Stanley added.
The weekly initial jobless claims numbers will also be published at 8:30 a.m., alongside December durable goods orders, the December advanced trade balance in goods, with advanced retail and wholesale inventories.
New homes sales for December will be released at 10 a.m.
On Friday, arguably the most important piece of monthly data will be revealed, the personal consumption expenditure price index. Economists see the core PCE index, which is the Fed’s favored inflation gauge, increasing by 3% year-over-year, a slowing pace that may encourage the central bank to start cutting borrowing costs in coming months.
Markets are pricing in a 97.4% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on January 31st, according to the CME FedWatch tool.
The chances of at least a 25 basis point rate cut by the subsequent meeting in March is priced at 43.5%, down from 55.5% just a week ago.
However, the economics team at Morgan Stanley led by Diego Anzoategui, thinks inflation may pick up again in coming months and thus the market is too optimistic about the timing of Fed rate cuts.
“[W]e see sticky services inflation temporarily reversing the downward trend in the 6-month core PCE inflation pace in 1H24. The acceleration in sequential prints will be an important factor delaying the Fed’s decision to cut,” said Morgan Stanley. “We continue to expect the Fed will first cut rates in June.”
The Treasury will auction $71 billion of 7-year notes at 1 p.m.
A poorly-received auction of 5-year notes on Wednesday caused benchmark yields to move up, briefly topping 4.18%, which was the highest level since the Fed’s last meeting in December, noted Deutsche Bank.
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