U.S. Treasury yields tumbled on Wednesday (10th) after data showed that inflation pressures eased more than expected in July, with the market assessing that the Fed’s rate hike in September will be narrowed.
U.S. consumer prices stagnated in July as gasoline costs fell sharply, the first clear sign of easing inflation that has climbed over the past two years.
The consumer price index (CPI) rose at an annual rate of 8.5% in July, while the core CPI, which excludes volatile food and energy costs, rose 5.9%. The sharp drop in U.S. Treasury yields means traders may have expected another sharp rise in inflation.
“An unexpected reduction in inflation is certainly not expected, but I think the market does expect higher inflation and higher Fed rate hikes,” said Gennadiy Goldberg, rates strategist at TD Securities in New York. prepare.”
Fed funds futures now see only a 38 percent chance the Fed will raise rates by 75 basis points at its September meeting, compared with a 68 percent chance previously. There is a 62% chance of a 50 basis point hike.
After the release of the CPI data, the yield on the benchmark 10-year Treasury note briefly fell to 2.67% before rebounding to 2.77%. The 2-year yield fell to 3.08% before rebounding to 3.15%. The 2-year and 10-year yield curve was at 39 basis points, having touched 53 basis points earlier, the deepest inversion since 2000.
Yields have recovered from four-month lows hit last week as investors adjusted for the possibility that the Fed will remain hawkish rather than slowing the pace of rate hikes as expected after its July meeting.
U.S. employment growth unexpectedly accelerated in July, with employment levels rising above pre-pandemic levels, boosting hawkish expectations, employment data on Friday showed. The Fed’s expectations may change again, with August inflation and employment data due before the Fed’s September 20-21 meeting.