Treasury yields experienced a slight increase early on Thursday, but still remained just above their lowest levels since mid-September as traders eagerly anticipated the release of the PCE inflation report.

What’s Happening

  • The yield on the 2-year Treasury (BX:TMUBMUSD02Y) saw a decline of 2.5 basis points, resting at 4.651%. Keep in mind that yields move in the opposite direction to prices.
  • On the other hand, the yield on the 10-year Treasury (BX:TMUBMUSD10Y) went up by 3.3 basis points, reaching 4.297%.
  • Likewise, the yield on the 30-year Treasury (BX:TMUBMUSD30Y) experienced a gain of 3.4 basis points, settling at 4.477%.

What’s Driving Markets

Ten-year Treasury yields have recently dropped from a 16-year high that was just above 5% in October to approximately 4.3%, all while fostering hopes that easing inflation will allow the Federal Reserve to initiate interest rate cuts by the spring of 2024.

There is further evidence to support the narrative of cooling price pressures in developed economies. Early Thursday, a report unveiled that annual eurozone inflation had decreased to 2.4% in November, marking the slowest pace since August 2021.

Now, attention has shifted to the United States and its forthcoming release of the personal consumption expenditure (PCE) price index for October. This index is considered one of the Federal Reserve’s preferred inflation indicators and is set to be released at 8:30 am Eastern Time.

Economists are anticipating that the U.S. core PCE index, which excludes more volatile price items like food and energy, will have risen by 0.2% month-on-month, matching September’s reading. The annual rate is expected to dip from 3.7% to 3.5%, which would be the lowest rate since July 2021.

U.S. Economic Updates for Thursday

Weekly Initial Jobless Claims: 8:30 a.m.

Chicago Business Barometer for November: 9:45 a.m.

October Pending Home Sales: 10 a.m.

Importance of Innovation in Central Banking

Speaker: New York Fed President John Williams

Time: 9:15 a.m.

Before these updates, the market is anticipating a 96% probability that the Fed will maintain interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on December 13th. The likelihood of the same outcome at the January meeting is 92%, according to the CME FedWatch tool.

However, analysts are reporting an increasing chance of at least a 25 basis point rate cut at the subsequent March meeting. This probability has risen to 45%, up from 12% a month ago.

Analyst Insights

Richard Hunter, head of markets at Interactive Investor, commented on the recent U.S. economic data: “Recent data has hinted at a slight cooling of the economy without significantly tipping the balance. Retail sales, job growth, and the unemployment rate have shown softer numbers.”

Hunter further mentioned, “The general expectation among investors is that the hiking cycle is complete. However, there is still some discrepancy between the consensus of rate cuts projected for the middle of next year and the Fed’s indication of maintaining higher rates for a longer period.”

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