The yield on US Treasury bonds rose moderately, while market participants are preparing for the release of the next US inflation data, which will help clarify the prospects for the Fed's monetary policy.
The yield on 5-year Treasury bonds rose by 3.0 basis points, reaching 4.152%, while the yield on 30-year bonds was 4.434% (+3.0 basis points). Meanwhile, the yield on 2-year Treasury bonds, reflecting expectations of short-term interest rates, increased by 1.4 basis points to 4.519%, while the yield on 10-year bonds increased to 4.225% (+3.3 basis points). The curve between the 10-year Treasury yield and the 2-year yield remains inverted, sending a warning that the economy may be falling or has already fallen into recession. Now the gap between 10 and 2 year U.S. debt is 29 basis points.
The US CPI data published yesterday, indicating an unexpected decline in prices in June, increased the likelihood of easing the Fed's monetary policy at the September meeting. Consumer price index fell by 0.1% after being unchanged in May. On an annual basis, the CPI rose by 3%, which is the weakest increase in a year. Core prices increased by 0.1% compared to May and by 3.3% year-on-year.
Investors have been hoping for data to suggest that inflation is on its way back to the Fed’s 2% target range, as this could mean interest rate cuts are on the horizon. According to the CME FedWatch Tool, markets see a 6.7% probability of a 25 basis point rate cut at the Fed meeting in July, a 92.5% probability of a rate cut in September, and a 96.6% probability of monetary policy easing in November.
Today, investors will focus on data on the producer price index for June, as well as the Reuters/Michigan consumer sentiment index for July. In May, the producer price index decreased by 0.2%. The latest change was another sign that inflationary pressures are returning to a downward trend. Economists expect producer prices to rise 0.1% month-on-month and 2.3% per annum in June. As for the core producer price index, forecasts suggest an increase of 0.1% per month and 2.4% in annual terms.