Traders Eye CPI as Rate-Cut Indicator Amid Pause in US Treasury Selloff
As investors shift their focus to bond auctions and the Consumer Price Index (CPI) for clues on the Federal Reserve's next move, the downward trend in U.S. Treasury bonds has paused. With the market reassessing and narrowing bets on interest rates after recent days of contraction in the pace of rate cuts, U.S. government bonds have risen, with short-term bonds leading the way. The yield on the two-year Treasury note fell by as much as 6 basis points to 3.94%, and the yield on the 10-year Treasury note fell by 3 basis points to 3.99%.
The strong non-farm payroll data released last week surprised traders who had bet that the Federal Reserve would make another significant rate cut this year, and it reignited concerns that inflation might flare up again. Investors are now primarily focused on the CPI data due out on Thursday, which is expected to show a gradual slowdown in the pace of price increases. The market will also be watching the demand levels for the three-year and 10-year Treasury bond auctions scheduled for Tuesday and Wednesday, respectively.
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Mark Haefele, Chief Investment Officer at UBS Global Wealth Management, stated: "The U.S. data is not strong enough for it to seem that the Federal Reserve's contribution to the global rate-cutting cycle is about to end."
Haefele said that investors still need to prepare for lower interest rates, expecting the Federal Reserve to cut rates by 50 basis points twice in November and December. He believes that inflation data will not pose much of an obstacle to further easing policies.
Traders are currently betting that by the end of this year, the Federal Reserve will cut rates by about 50 basis points, and by October 2025, it is expected to cut rates by less than 150 basis points. This is lower than the expectation of about 200 basis points in cuts by the end of September.
U.S. Treasury bonds plummeted on Monday, with key yields rising above 4%, the highest level since August last year, primarily due to the market scaling back expectations of Federal Reserve rate cuts, which cooled the bond buying frenzy. Previously, bonds had risen for five consecutive months.
Patrick Armstrong, Chief Investment Officer at Plurimi Wealth, said on Bloomberg TV: "The market's pricing of Federal Reserve rate cuts is indeed a bit ahead of itself." "I do think that by 2025, inflation could become an issue again."
Attention is once again turning to inflation trends, with Federal Reserve official Adriana Kugler stating that the Federal Reserve should focus on bringing inflation back to the 2% target, and she "strongly supports" the 50 basis point rate cut last month. Meanwhile, St. Louis Fed Chairman Alberto Musalem warned that further rate cuts should be gradual.