Treasury yields steady ahead of report expected to show lowest CPI inflation in nearly two years

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Bond yields were little changed early Tuesday as traders kept their powder dry ahead of a crucial U.S. consumer price inflation report.

What’s happening

  • The yield on the 2-year Treasury
    BX:TMUBMUSD02Y
    slipped 2.1 basis points to 4.472%. Yields move in the opposite direction to prices.

  • The yield on the 10-year Treasury
    BX:TMUBMUSD10Y
    fell 1.1 basis points to 4.177%.

  • The yield on the 30-year Treasury
    BX:TMUBMUSD30Y
    eased less than 1 basis point to 4.381%.

What’s driving markets

The Bureau of Labor Statistics will publish U.S. consumer price index data for January at 8:30 a.m. Eastern.

Headline annual CPI inflation is forecast to have fallen from 3.4% in December to 2.9% last month, the lowest since March 2021. The core annual rate — which strips out volatile items like food and energy — is expected to drop from 3.9% to 3.7%.

Month-on-month the headline rate is forecast to dip from 0.3% in December to 0.2% in January, but for the core to remain at 0.3%.

The data “will likely set the tone for financial markets over the next two weeks, until the January PCE deflator release on Feb. 29,” said Stephen Stanley, chief U.S. economist at Santander.

If the report matches expectations or is lower than forecast then traders may consider a rate cut by the Federal Reserve in May is more likely.

Currently, markets are pricing in an 86.5% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on March 20th, according to the CME FedWatch tool.

The chances of at least a 25 basis point rate cut by the subsequent meeting in May is priced at 54.7%. The central bank is expected to take its Fed funds rate target back down to around 4.31% by December 2024, according to 30-day Fed Funds futures.

Elsewhere, there was a reminder from the U.K. that inflationary pressures can stick around. Britain’s Office for National Statistics said that average weekly wages, including bonuses, rose 5.8% in the year to December, higher than forecasts of 5.6%.

The uptick in earnings inflation came as the U.K. labor market tightened, with the unemployment rate falling from a revised 4.2% in November to 3.8% in December. The pound
GBPUSD,
+0.18%

rose and the U.K. 2-year government bond yield climbed 3.3 basis points to 4.091%.

What are analysts saying

“Last week, Fed officials across the hawk-dove spectrum mostly reiterated Chair Powell’s messages from the January FOMC meeting: they are encouraged by the recent progress on inflation but need to see more data to gain confidence that inflation is trending sustainably to 2%,” said Deutsche Bank economists led by Amy Yang.

“These comments, alongside the strong January payroll data as well as the marginal impact from the CPI seasonal factor revisions, are consistent with our Fed view for the first cut to begin in June and 100bps of total reductions to be delivered this year,” the Deutsche Bank team added.



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