Bond yields were little changed early Wednesday as traders eschewed bold bets before a crucial inflation report.
What’s happening
-
The yield on the 2-year Treasury
BX:TMUBMUSD02Y
eased by 1 basis point to 5.030%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
rose less than 1 basis point to 4.296%. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
rose 2.1 basis points to 4.374%.
What’s driving markets
All eyes are on the U.S. consumer price index data, due for release at 8:30 a.m. Eastern. The report will provide clues to the likely trajectory of Federal Reserve policy in coming months.
Economists expect the headline year-over-year CPI to have risen 3.6% in August, up from 3.2%, and for the month-on-month reading to come in at 0.6%, above July’s 0.2%, with the increases primarily reflecting higher oil prices.
Greater focus will be on the core measure, which strips out the volatile items such as energy and food, and here August is expected to show an annual increase of 4.3%, lower than July’s 4.7%, while the monthly change is forecast to have stayed the same at 0.2%.
Markets are pricing in a 93% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on September 20, according to the CME FedWatch tool.
The chances of a 25 basis point rate hike to a range of 5.50 to 5.75% at the subsequent meeting in November is priced at 38%.
The central bank is not expected to take its Fed funds rate target back down to around 5% until August 2024, according to 30-day Fed Funds futures.
Other U.S. economic updates set for release on Wednesday include the federal budget report for August, due at 2 p.m.
The Treasury will auction $20 billion of 30-year bonds.
Over in Europe, the 10-year German bund yield
BX:TMBMKDE-10Y
rose 1 basis point to 2.654% after Reuters reported that the European Central Bank expects inflation in the eurozone to remain above 3% next year, boosting the case for a tenth consecutive interest rate increase on Thursday.
U.K. 10-year yields
BX:TMBMKGB-10Y
fell 1.6 basis points to 4.397% after data showed the British economy contracting by 0.5% between June and July, a bigger fall than the 0.2% decline predicted by analysts.
What are analysts saying
“Global markets are feeling the heat from higher oil prices and their inflationary implications, as the recent price upswing carries inherent risks to the Fed’s inflation and interest rate outlook,” said Stephen Innes, managing partner at SPI Asset Management.
“While the current surge might not tip the scales to a September hike, oil prices at +$90 per barrel do fit the Fed criteria that would justify another rate increase in either November or December,” he added.
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