As traders and investors eagerly anticipate fresh insights into the state of the U.S. economy, bond yields remained relatively unchanged on Monday.
- The yield on the 2-year Treasury BX:TMUBMUSD02Y inched up less than 1 basis point to 4.097%. It is important to note that yields move in the opposite direction to prices.
- The yield on the 10-year Treasury BX:TMUBMUSD10Y experienced negligible movement, staying steady at 4.151%.
- The yield on the 30-year Treasury BX:TMUBMUSD30Y dipped by less than 1 basis point to 4.259%.
With no notable economic data scheduled for Monday, investors are eagerly anticipating several macro updates set to be released later in the week. These updates include U.S. retail sales on Tuesday, the minutes of the previous Federal Open Market Committee meeting on Wednesday, and the leading economic indicators report on Thursday.
It is worth noting that benchmark 10-year Treasury yields currently sit near the upper end of their recent range, just a few basis points below their highest level since 2008. This rise in yields can be attributed to headline inflation being only 1.2 percentage points above the Federal Reserve’s target of 2%, while market concerns about the absorption of $1 trillion in supply during the third quarter grow.
According to the CME FedWatch tool, markets are currently pricing in an 89% probability that the Fed will leave interest rates unchanged within a range of 5.25% to 5.50% after its upcoming meeting on September 20.
Market Predicts 25 Basis Point Rate Hike in November
The market currently stands at a 32% chance of a 25 basis point rate hike, bringing the range to 5.50% to 5.75%, at the upcoming meeting in November.
According to 30-day Fed Funds futures, the central bank is not expected to lower its Fed funds rate target to approximately 5% until May 2024.
Here’s what analysts are saying about the situation:
Goldman Sachs’ economics team, led by Jan Hatzius, believes that the Federal Open Market Committee (FOMC) will decide against a rate hike in September. They expect that in November, the FOMC will conclude that the core inflation trend has slowed enough to render a final rate hike unnecessary. This outlook is supported by the soft July Consumer Price Index (CPI) report and dovish comments made by New York Fed President John Williams during the week of August 7.
Looking ahead, Goldman Sachs predicts the first rate cut to take place in the second quarter of 2024. They anticipate that by that time, core Personal Consumption Expenditures (PCE) inflation will have dropped below 3% on a year-on-year basis, and below 2.5% on a monthly annualized basis. Additionally, they expect wage growth to fall below 4% year-on-year. These thresholds for cutting align closely with the annual forecasts in the FOMC’s Summary of Economic Projections. The conditions mirror those at the beginning of the last cutting cycle in 1995 when the aim was to normalize policy stance as inflation subsided.