U.S. bond yields experienced an early rise on Tuesday as traders monitored several significant economic indicators set to be released in the coming days.

Market Reaction and Catalysts

Benchmark bond yields climbed higher as investors considered various market factors and looked ahead to the release of potentially market-moving data later in the week.

Focus on U.S. Economic Updates

  • S&P manufacturing purchasing managers’ index for December (expected at 9:45 a.m. Eastern)
  • November construction spending (expected at 10 a.m.)

Moreover, the upcoming labor data will play an essential role in shaping short-term yield expectations and investor sentiment towards potential interest rate cuts by the Federal Reserve.

Labor Data to Watch

  • JOLTS job opening report (Wednesday)
  • ADP private sector jobs report for December (Thursday)
  • Weekly initial jobless claims numbers (Thursday)
  • Nonfarm payrolls data for December (Friday)

These reports will offer valuable insights into the labor market, giving investors a clearer idea of whether they support or oppose the narrative of potential interest rate cuts by the Federal Reserve.

Markets Indicate High Probability of Unchanged Interest Rates

Market sentiment suggests an 89.1% chance that the Federal Reserve will maintain interest rates at a range of 5.25% to 5.50% after its forthcoming meeting on January 31st, as per the CME FedWatch tool.

Expectations of Rate Cut in March Remain Strong

Additionally, there is an 82.2% likelihood of at least a 25 basis point rate cut during the subsequent meeting in March.

Forecasts Suggest Decrease in Fed Funds Rate

Analysts anticipate that the central bank will gradually decrease its Fed funds rate target to around 3.90 by December 2024, according to 30-day Fed Funds futures.

Persistent Optimism Surrounding Rate Cuts

“There is a growing belief that Fed rate cuts, which have played a bullish role in recent capital market trends, continue to shape overall market sentiment,” commented Stephen Innes, managing partner at SPI Asset Management.

“While a stronger-than-expected U.S. jobs report could shake this conviction, a reversal would require a resurgence in realized inflation and a significantly more assertive hawkish stance from Chair Powell and other key figures, dampening expectations of rate cuts in March or May. Market participants are now pondering how the disparity between market-based rate cut expectations and the Fed’s projections will be reconciled,” added Innes.

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