Bond yields fell very slightly early Tuesday as traders waited for the consumer inflation report that may cement a pause in the Federal Reserve’s rate hiking campaign.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.594%
eased less than 1 basis point to 4.573%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.737%
retreated 1.3 basis points to 3.727%. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.877%
less than 1 basis point to 3.875%.
What’s driving markets
Traders will be looking ahead to the U.S. consumer price index report report due at 8:30 a.m. Economists forecast that headline annual CPI inflation, which hit a four-decade high of 9.1% last June, and which by April had cooled to 4.9%, will ease further to 4% in May.
A lot of the decline will be due to lower energy costs, and so by stripping such volatile items out, including food prices, the core annual inflation rate may fall from 5.5% in April to 5.3% in May.
The month-on-month figures are expected to be headline inflation of 0.1% in May, down from 0.4% in April, and core to stay the same at 0.4%.
If the CPI report matches or is softer than expectations then it is vey likely the Federal Reserve will pause its rate-hiking cycle this month.
Markets are already pricing in a 76% probability that the Fed will leave interest rates unchanged at a range of 5.0% to 5.25% after its meeting on Wednesday, according to the CME FedWatch tool.
What are analysts saying
“Of course, the big question from the CPI will be how it affects the Fed’s policy decision tomorrow. Currently this morning, futures are pricing in just a 20% likelihood of a further hike in June, suggesting that they’ll finally hit the pause button after a series of 10 successive increases. But given there’s only a day to go, the fact that markets are still pricing in a non-trivial likelihood of a June hike shows that they’re not ready to discount the probability of a move just yet,” said Henry Allen, strategist at Deutsche Bank.
“The view of our economists is that the Fed will remain on hold this week, and even if the CPI surprised moderately on the upside, the Fed could instead meet that with a stronger tightening signal from the dot plot and Chair Powell’s press conference. Their view is it would take a sizeable outperformance to see the FOMC surprise the market with a hike,” he added.
This post was originally published on Market Watch
