Bond yields inched higher early Thursday as traders continued to parse the minutes from the Federal Reserve’s last meeting and awaited more updates on the U.S. jobs market.
What’s happening
-
The yield on the 2-year Treasury
BX:TMUBMUSD02Y
was barely changed at 4.341%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
rose 3.3 basis points to 3.953%. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
added 4 basis points to 4.114%.
What’s driving markets
The minutes of the Federal Reserve’s December policy meeting, published Wednesday, were generally deemed by commentators to be less dovish than investors may have hoped, with officials giving little indication the central bank is minded to reduce interest rates at the pace priced in by the market.
However, benchmark 10-year bond yields have steadied below 4% after traders also noted that the latest job openings and manufacturing surveys showed a slowing economy that could help the Fed meet its 2% inflation target.
Investors will therefore be hoping that the December nonfarm payrolls report, published Friday, will match the narrative of a labor market that is cooling and thus suppressing wage inflation.
See: Holiday hiring boom or bust? December jobs report to tell us.
U.S. economic updates set for release on Thursday include the ADP private sector employment report for December, due at 8:30 a.m. Eastern, weekly initial jobless benefit claims at 8:30 a.m., and the S&P final services PMI for December at 9:45 a.m.
Ahead of all that, markets are pricing in a 93.3% probability that the Fed will leave its benchmark 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 at the subsequent meeting in March is priced at 70.2%. The central bank is expected to take its Fed funds rate target back down to around 3.95 by December 2024, according to 30-day Fed Funds futures.
What are analysts saying
“Since the last FOMC minutes, we’ve seen the labor market continue to come into better balance, downside surprises on inflation, and an easing in financial conditions,” said the economics team at Morgan Stanley led by Ellen Zentner, chief U.S. economist. “Markets have interpreted recent FOMC commentary and softer data in 4Q23 as enough evidence for the Fed to begin cutting earlier and more aggressively than our expectations and what is implied by the Fed’s Summary of Economic Projections in December.”
“The FOMC minutes for December increased the emphasis that they are not preparing to cut interest rates soon. While risks to growth and inflation have come into better balance, they are still highly attentive to inflation risks and see risk to rates staying at current levels for longer than anticipated. We continue to expect the Fed to deliver the first cut in June,” Morgan Stanley added.
