Bond yields advanced Friday ahead of a Federal Reserve Chair Jerome Powell’s long-awaited speech, as well as the latest reading of the central bank’s preferred inflation gauge.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
3.384%
rose 2 basis points to 3.38%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.083%
increased 5 points to 3.08%. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.281%
gained 5 points to 3.28%.
What’s driving markets
Powell is speaking at 10 a.m. Eastern in Jackson Hole, Wyo., with expectations that he will try to reinforce the central bank’s commitment to fighting inflation.
“We expect Fed Chair Powell to emphasize the Fed’s commitment to restoring price stability,” said Bank of America economists led by Michael Gapen.
Powell may indicate the possibility the Fed could slow down the pace of rate hikes at some point, but will emphasize the need to bring rates into restrictive territory, having now reached the point at which they are considered neutral to the economy, said Gapen.
“We expect the Fed to push back against any notion of a quick pivot to rate cuts. We think Powell is likely to repeat that the Fed will keep policy restrictive until it has clear and convincing evidence PCE inflation is on a path to average 2% over time,” he added.
Traders will be looking not just for clues on what the Fed will do this year, but importantly, how the Fed may react next year, particularly if the U.S. economy slides into recession.
“Bond traders are essentially saying the Fed can raise rates all it wants this year, but it will still be cutting them next year to deal with some crisis. This assumption has been embedded into asset prices, keeping longer-dated yields artificially low and the yield curve deeply inverted, which is counterproductive for the Fed in its inflation battle,” said Marios Hadjikyriacos, senior investment analyst at XM.
The latest PCE price index data, covering July, is due for release at 8:30 a.m. Expectations are for the core PCE price index that is closely watched by Fed policymakers to decelerate slightly to a 4.7% year-over-year rate, from 4.8%.
This post was originally published on Market Watch
