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Bond Yields Decline Ahead of Key Economic Data

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Andrew R. Michaud

• January 25, 2024

Bond yields experienced a decline early Thursday as investors eagerly awaited the release of crucial economic data in the upcoming sessions. This data has the potential to influence the Federal Reserve's policy debate during their meeting next week.

Market Expectations and Interest Rate Cuts

Traders will closely monitor the U.S. economic data over the next few sessions, paying particular attention to any factors that may challenge the current market consensus. Presently, it is widely believed that the Fed will reduce interest rates in the coming months due to easing inflation and the avoidance of a recession.

Anticipated GDP Report

On Thursday at 8:30 a.m. Eastern, the fourth-quarter GDP report will be released. Economists predict an annualized growth rate of 2%, down from 4.9% in the third quarter.

Stephen Stanley, Chief U.S. Economist at Santander, remarked, "The economy likely advanced by 2¾% to 3% throughout 2023, which is a significant improvement compared to the predictions made a year ago about an imminent recession."

Stanley also stated that consumer financial health seems favorable for now, but warns that household spending may slow down as the labor market cools over the course of the year. Ultimately, Stanley projects a modest 1.4% (Q4/Q4) real GDP growth for the year in comparison to general consensus.

Additional Economic Data Releases

In addition to the GDP report, other notable economic data will be published at 8:30 a.m. This includes the weekly initial jobless claims numbers, December durable goods orders, and the December advanced trade balance in goods. Furthermore, data on advanced retail and wholesale inventories will be available.

At 10 a.m., new homes sales for December will also be released.

Personal Consumption Expenditure Price Index: A Key Monthly Data

One of the most crucial pieces of monthly data, the personal consumption expenditure price index, will be unveiled on Friday. This index is considered by economists as the Federal Reserve's preferred inflation gauge. They expect the core PCE index to show a 3% year-over-year increase, indicating a slower pace of growth. Such a trend may potentially encourage the central bank to begin cutting borrowing costs in the upcoming months.

Market Predictions and Expectations

The latest estimations from the market suggest a strong likelihood (97.4%) that the Federal Reserve will maintain interest rates within the range of 5.25% to 5.50% after its next meeting on January 31st. This information is based on data from the CME FedWatch tool.

Additionally, there is a 43.5% chance, down from 55.5% a week ago, of witnessing at least a 25 basis point rate reduction by the subsequent meeting in March.

Morgan Stanley's Perspective on Inflation

Morgan Stanley's economics team, led by Diego Anzoategui, holds a differing opinion. They believe that inflation might experience an upward trajectory in the coming months. Consequently, they argue that the market's optimism regarding the timing of the Fed rate cuts may be misplaced.

According to Morgan Stanley, "We anticipate stickiness in services inflation, which will temporarily reverse the downward trend in the 6-month core PCE inflation pace in 1H24. The acceleration in sequential prints will play a crucial role in delaying the Fed's decision to cut rates. Hence, we maintain our expectation that the Fed will initiate rate cuts in June."

Upcoming Treasury Auction

The Treasury plans to hold an auction for $71 billion worth of 7-year notes at 1 p.m.

Deutsche Bank observed that following a poorly-received auction of 5-year notes on Wednesday, benchmark yields briefly exceeded 4.18%, marking the highest level since the Fed's last meeting in December.