U.S. bond yields of shorter-duration were slightly higher on Thursday amid cautious trading ahead of the U.S. December inflation report.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
4.232%
rose by 2.9 basis points to 4.245%. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.526%
added 1 basis point to 3.548%. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.644%
fell 1.8 basis points to 3.654%.
What’s driving markets
Traders are waiting for the December consumer price index report due 8:30 a.m, with bond investors hoping it will show U.S. inflation, which hit a four-decade peak of 9.1% in June, and dropped to 7.1% in November, will continue to decline.
Economists forecast that headline CPI will have shown a rise of 6.5% from a year ago and that core CPI, which strips out more volatile items like energy and food, will have climbed 5.7%, compared to 6% in November. On a month-on-month basis headline CPI is expected to have dipped 0.1 and core to have risen 0.3%.
See: Inflation is slowing, CPI to show. But is it slowing fast enough for the Fed?
Confirmation of the trend may solidify market expectations that the Federal Reserve can consider easing monetary policy later this year.
Markets are pricing in a 79.2% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.50% to 4.75% after its meeting on February 1st, according to the CME FedWatch tool. The central bank is expected to take its Fed funds rate target to 4.93% by June 2023, according to 30-day Fed Funds futures.
What are analysts saying
“Whatever happened to the December core CPI, our overall take on U.S. inflation is unchanged; we expect margin re-compression to drive it down faster than the Fed expects this year,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
“We also think the labor market will loosen more quickly than is implied by FOMC members’ inflation forecasts, allowing policymakers to become more confident that inflation will not rebound once margins have re-normalized. That, in turn, will pave the way to the Fed easing, modestly, late this year,” he added.