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Finance December 9, 2024

US Inflation Steady, Yields Tick Higher

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On Wednesday, the US Treasury bond market mirrored a complex dance, first experiencing an ascent in prices, propelled by inflation data, only to later descend and lose the momentum gainedThis fluctuation presents a compelling case for analysts and investors alike as they speculate about potential interest rate cuts by the Federal Reserve in the coming weeks, particularly in light of ongoing economic uncertainties that cast a shadow over America's long-term economic outlook.
The increase in oil prices has contributed to a market sell-off, leading to a brief spike in the yield on the 2-year Treasury bond, which once surged by 5 basis points but ultimately settled up only 1 basis point by the close of tradingEarlier sessions on that same day saw yields on short-term bonds dip initially, in alignment with the US Consumer Price Index (CPI) figures for November that met economist expectations, but they soon began to rebound.

The CPI data has fortified the belief among traders that the Federal Open Market Committee (FOMC) will opt for a 25 basis point cut on December 18, marking the third reduction for the yearSwaps that correlate with this decision mirror a nearly 23 basis point easing, a slight increase from the 20 basis points noted prior to the report's publicationEven as yields on Treasury bonds began to retract from their earlier declines, this pricing remained steady.

According to Jay Bryson, chief economist at Wells Fargo, the Federal Reserve is poised to implement a 25 basis point cut next week, saying, “We see no reason to suggest that the Federal Reserve will hold off on cuts next week.”

The data from the US Bureau of Labor Statistics indicates that the core CPI, excluding food and energy prices, has risen 0.3% for the fourth consecutive month, with an annual increase of 3.3%. Lara Castleton, who oversees portfolio construction and strategy for Janus Henderson Investors, which manages $382 billion in assets, commented, “While today’s data removes the last obstacle for a rate cut by the Fed next week, the recent uptick in inflation will make it challenging for the Fed to justify additional cuts through 2025. Concern over renewed inflation is among our clients' primary worries for the coming year.”

However, there exists a faction on Wall Street that interprets Wednesday’s data as a sign that disinflationary trends may have stalled, leading some to hypothesize that the Fed could maintain rates after a potential increase next week

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Economists' predictions vary widely, from expecting cuts of 25 basis points at every meeting before mid-year to asserting that there may be no cuts through 2025.

Swaps traders anticipate that by the end of 2025, the Fed will have enacted cumulative cuts amounting to 82 basis points, suggesting approximately two additional rate reductions after next week's forecasted cutThis projection falls short of the four rate cuts suggested in the most recent dot plot issued by Federal Reserve officials in September.

After the data release, there was a noticeable uptick in buying interest for January and February Federal Funds futures, fueled by a growing anticipation for a December rate cutThis reflects a shifting sentiment among investors leaning increasingly toward the notion that the Federal Reserve may open 2025 with a series of cutsSince the mixed non-farm payroll report from November was released last Friday, these contracts have seen heightened activity, with Morgan Stanley also projecting a 25 basis point cut by the Fed during both the December and January policy meetings.

Despite robust demand during the monthly auction for 10-year US Treasury bonds, this was insufficient to quell the rise in yields, with most yields reaching daily highs post-auction

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