Bond markets opened the week with minimal movement in yields as investors awaited further guidance regarding the Federal Reserve’s stance on monetary policy. Here’s a detailed look at the current market conditions and factors influencing bond yields:
The yields on key Treasury securities saw slight adjustments early Monday:
- The 2-year Treasury yield fell by less than 1 basis point to 4.740%.
- The 10-year Treasury yield declined marginally to 4.256%, also dropping less than 1 basis point.
- Similarly, the 30-year Treasury yield dipped slightly to 4.395%.
The week started quietly in bond markets, lacking significant new catalysts that could drive major movements. Market participants are particularly focused on the upcoming release of the Personal Consumption Expenditure (PCE) Price Index on Friday. This index is crucial for the Federal Reserve as it is their preferred gauge of inflation, influencing their policy decisions.
Federal Reserve officials are scheduled to make public appearances today. Chicago Fed President Austan Goolsbee is set to appear on television at 8:30 a.m. Eastern Time, followed by a speech from San Francisco Fed President Mary Daly at 2 p.m. These speeches may offer insights into the Fed’s current assessment of economic conditions and their outlook on interest rates.
According to the CME FedWatch tool, there is an 89.7% probability that the Fed will keep interest rates unchanged at the range of 5.25% to 5.50% during its upcoming meeting on July 31st. However, market expectations for a rate cut in September have risen to 65.9%, up from 49.4% a month earlier. This shift suggests increasing anticipation in the market for a more accommodative monetary policy stance in the near term.
Jennifer McKeown, chief global economist at Capital Economics, believes that core PCE inflation will likely decline from the Fed’s projected 2.8% by the end of the year to around 2.5%. This discrepancy between market expectations and the Fed’s projections could influence policy decisions. McKeown suggests that if there are further signs of weakness in the labor market, it could prompt the Fed to lean towards implementing more rate cuts, possibly as early as September.
Overall, while bond yields showed little movement on Monday, market participants are closely monitoring upcoming economic data releases, Fed communications, and developments in inflation and labor market conditions. These factors will likely shape expectations regarding the Fed’s future policy actions and their impact on bond markets in the coming weeks.