Bond yields fell on Thursday as traders prepared for a big batch of U.S. economic data.
What’s happening
-
The yield on the 2-year Treasury
BX:TMUBMUSD02Y
dipped 2.1 basis points to 4.566%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
fell 2.5 basis points to 4.227%. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
lost 3.1 basis points to 4.406%.
What’s driving markets
Bond markets appear to have settled down since Tuesday’s news of faster-than-forecast consumer inflation sparked a sell-off in bonds that pushed 10-year yields to 4.33% at one point during the session.
Early action Thursday sees the benchmark yield trading some 10 basis points lower than that recent peak as investors wait to see what clues a big dump of data can give on the health of the U.S. economy, and by extension the likely trajectory of Federal Reserve monetary policy.
Perhaps the most important piece of news will be the retail sales report for January, due at 8:30 a.m. Eastern. Economists expect a 0.2% fall compared to the 0.6% rise seen in December.
Other updates set for release on Thursday include the weekly initial jobless claims, the February Empire State manufacturing survey, the February Philadelphia Fed manufacturing survey, and January import prices, all due at 8:30 a.m.
Industrial production and capacity utilization data for January will be published at 9:15 a.m., followed at 10 a.m. by the February reading of the home builder confidence index and December business inventories.
There’s also more Fedspeak, with Fed Governor Christopher Waller making comments at 1:15 p.m. and Atlanta Fed President Raphael Bostic talking at 7 p.m.
Ahead of all those potential catalysts, markets are pricing in an 89.5% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on March 20th, according to the CME FedWatch tool.
The chances of at least a 25 basis point rate cut by the subsequent meeting in May is priced at 40.5%, down from around 54% before the CPI inflation was released on Tuesday.
The central bank is expected to take its Fed funds rate target back down to around 4.44% by December 2024, according to 30-day Fed funds futures. A month or so ago the market was pricing in a Fed funds rate of 3.8% by year end.
What are analysts saying
“Today we have a busy day of U.S. data with retail sales the highlight. So we will see if that continues to encourage volatility ahead of an important U.S. producer price index tomorrow, as some of its subcomponents inform forecasts for the core personal consumption expenditure number later this month,” said Jim Reid, strategist at Deutsche Bank.
“As Chicago Fed President Goolsbee reminded markets yesterday, the Fed’s inflation goal is based on the core PCE number, and not CPI. In addition, some of the strong services CPI drivers we saw in Tuesday’s print do not enter the PCE calculation and are instead taken from the PPI,” Reid added.
