U.S. Treasury bond yields rose slightly, while market participants continued to assess the impact of recent economic data on the Fed's policy outlook.
The yield on 5-year Treasury bonds grew by 0.7 basis points, reaching 4.162%, while the yield on 30-year bonds was 4.323% (+1.1 basis points). Meanwhile, the yield on 2-year Treasury bonds, reflecting expectations of short-term interest rates, rose by 1.2 basis points to 4.611%, while the yield on 10-year bonds increased to 4.162% (+0.7 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 45 basis points.
Yesterday's data showed that the consumer prices index rose by 0.4% m/m in February, as expected. On an annualized basis, the CPI increased by 3.2%, slightly exceeding forecasts (+3.1%). Although inflation has fallen from the highs of 2022, it remains above the Fed's 2% target. Fed officials have often indicated that they study economic data in search of evidence that inflation is returning to target before making decisions to lower interest rates. According to the CME FedWatch Tool, markets see a 14.5% probability of a 25 basis point rate cut at the Fed meeting in May, and a 66.3% probability of a rate cut in June (compared to 71.7% yesterday).
Attention now turns to U.S. retail sales, an indication of consumer spending that has been resilient so far, and producer prices due out later this week. Retail sales fell by 0.8% in January, while personal spending adjusted for inflation decreased by 0.1%. Despite the fact that spending growth is expected to slow down this year, experts believe that the January slowdown somewhat exaggerates the short-term decline in consumption. Households continue to benefit from the tailwind of real incomes, which should support spending in the near future. Experts expect to see a recovery in spending in February and forecast retail sales growth of 0.8%. Some growth in retail sales will be provided by cars. Previously published car sales data suggest a recovery in sales after a decline in January, which should lead to a decent increase in the overall figure. Excluding car sales, retail sales are expected to have grown by a more modest but still high 0.4%. Sales at other retailers are likely to be unstable. Market participants will also be watching sales in the food service industry - the only retail category in the services sector. This component has increased for 11 months in a row and indicates a noticeable compensation for wider consumption. Overall, retail data is expected to show that consumers are still spending money.