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Bond Yields Steady as Traders Await Inflation Data

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Andrew R. Michaud

• August 31, 2023

Bond yields remained relatively unchanged on Thursday morning as traders exercised caution ahead of the release of crucial inflation data.

The personal consumption expenditure price index for July is set to be published at 8:30 a.m. Eastern.

Experts predict that the core PCE price index, which is considered one of the Federal Reserve’s preferred indicators of inflation, will have increased by 0.2% on a monthly basis, matching June's figures, and reaching an annual rate of 4.2%, up from 4.1% in June.

Following a series of economic data pointing towards a slowdown in the U.S. economy, ten-year Treasury yields have fallen from a 16-year high of 4.36% reached last week to 4.10%. This decline may further support the Fed's efforts to curb inflation.

According to the CME FedWatch tool, market expectations suggest an 89% likelihood that the Federal Reserve will maintain interest rates within a range of 5.25% to 5.50% at its upcoming meeting on September 20.

Furthermore, the probability of a 25 basis point rate hike to a range of 5.50% to 5.75% at the following meeting in November has decreased from 46% to 40% since the release of the ADP private sector jobs report, which fell short of expectations, on Wednesday.

Analysts anticipate that it is unlikely for the central bank to reduce its Fed funds rate target to around 5% until June 2024, as indicated by 30-day Fed Funds futures.

Economic Updates

U.S. Economic Data

On Thursday, several U.S. economic updates are scheduled for release. These include:

• Weekly initial jobless claims at 8:30 a.m.
• Chicago Business Barometer for August at 9:45 a.m.

European Market

In Europe, the 10-year German bund yield BX:TMBMKDE-10Y has decreased by 4.4 basis points to 2.504%. This decline follows the release of data indicating that the eurozone's core consumer prices index rose by 0.3% in August, aligning with previous forecasts.

Analyst Insights

According to Bill Adams, the chief economist for Comerica Bank, the recent softening of U.S. jobs and GDP data could potentially influence the Federal Reserve's stance in the coming months. Adams states that the economy is slowing down to a level that matches the demand with the country's productive capacity, thereby curbing inflation. He also notes that job growth is gradually aligning with the growth rate of the working-age population.

Furthermore, the revised GDP figures bring positive news on two fronts. Firstly, overall economic growth still appears robust. Secondly, the downward revisions decrease the risk of the economy overheating and intensifying inflationary pressures. Adams believes that these factors create additional leeway for the Federal Reserve to consider rate cuts in the first half of 2024, as evidenced by the ADP release and GDP revisions.