The market for bond yields saw limited movement early Wednesday, as traders avoided making significant bets in anticipation of an important inflation report. Here are the key details:
Yield Changes
- The yield on the 2-year Treasury (BX:TMUBMUSD02Y) decreased by 1 basis point to 5.030%. It’s important to note that yields move in the opposite direction to prices.
- The yield on the 10-year Treasury (BX:TMUBMUSD10Y) rose by less than 1 basis point to 4.296%.
- The yield on the 30-year Treasury (BX:TMUBMUSD30Y) increased by 2.1 basis points to 4.374%.
Factors Driving the Market
All eyes are currently focused on the upcoming release of the U.S. consumer price index data at 8:30 a.m. Eastern Time. This report is expected to provide valuable insights into the Federal Reserve’s future policy decisions. Here’s what economists are predicting:
- Economists anticipate a 3.6% year-over-year increase in the headline CPI for August, up from 3.2%. Additionally, the month-on-month reading is expected to come in at 0.6%, surpassing July’s 0.2%. These numbers can primarily be attributed to higher oil prices.
- However, the core measure, which excludes volatile items like energy and food, is expected to show a year-on-year increase of 4.3% for August, lower than July’s 4.7%. The monthly change is forecasted to remain steady at 0.2%.
Market indicators currently suggest a 93% probability that the Federal Reserve will maintain interest rates at a range of 5.25% to 5.50% after its next meeting on September 20, according to the CME FedWatch tool. Furthermore, there is a 38% chance of a 25 basis point rate hike to a range of 5.50% to 5.75% at the subsequent meeting in November.
The Central Bank’s Rate Target and Economic Updates
According to 30-day Fed Funds futures, it is not expected that the central bank will lower its Fed funds rate target back down to around 5% until August 2024.
U.S. Economic Updates
Other U.S. economic updates set for release on Wednesday include the federal budget report for August, which is due at 2 p.m.
Treasury Auction
The Treasury will be auctioning $20 billion of 30-year bonds.
European Market Update
In Europe, the 10-year German bund yield BX:TMBMKDE-10Y rose by 1 basis point to 2.654%. This increase came after Reuters reported that the European Central Bank expects inflation in the eurozone to remain above 3% next year, which boosts the case for a tenth consecutive interest rate increase on Thursday.
U.K. Economic News
U.K. 10-year yields BX:TMBMKGB-10Y fell by 1.6 basis points to 4.397% after data showed that the British economy contracted by 0.5% between June and July. This decline was bigger than the 0.2% fall predicted by analysts.
Analyst Insights
“Global markets are feeling the heat from higher oil prices and their inflationary implications, as the recent price upswing carries inherent risks to the Fed’s inflation and interest rate outlook,” said Stephen Innes, managing partner at SPI Asset Management.
“While the current surge might not tip the scales to a September hike, oil prices at +$90 per barrel do fit the Fed criteria that would justify another rate increase in either November or December,” he added.
