U.S. Treasury yields rose sharply, while market participants monitored a reversal of the previous day's global market sell-off.
The yield on 5-year Treasury bonds increased by 7.0 basis points, reaching 3.696%, while the yield on 30-year bonds was 4.104% (+3.3 basis points). Meanwhile, the yield on 2-year Treasury bonds, reflecting expectations of short-term interest rates, increased by 7.3 basis points to 3.954%, while the yield on 10-year bonds rose to 3.841% (+5.9 basis points) after hitting its lowest level since June 2023 yesterday. 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 11 basis points.
Markets around the world suffered sharp falls yesterday as weaker-than-expected US data left investors worried that the Fed may be behind the curve in cutting interest rates to fend off a recession. However, Fed policymakers rejected the view that July employment data meant the economy was in recessional freefall, but also warned that the central bank would need to ease monetary policy to avoid such an outcome. Meanwhile, economists said Fed Chair Jerome Powell is likely to provide definitive guidance at this year's Jackson Hole Economic Symposium in August. According to the CME FedWatch Tool, markets see a 76.5% probability of a 0.5% rate cut in September, and a 52.5% probability of 0.25% rate cut in November. Overall, futures impose 110 basis points of cuts this year.
Today, market participants will continue to follow the statements of Fed policymakers, as well as pay attention to the US trade balance report for June. Net exports reduced real GDP growth by 0.7% in the second quarter. The negative contribution was due to the fact that real imports (6.9%) significantly outstripped real exports (2.0%). Experts expected that trade would restrain GDP growth, as imports in the second quarter were more dynamic than exports, but detailed data for June will be published today at 12:30 GMT. The trade deficit is projected to have decreased to $72.4 billion in June from $75.1 billion in May. Preliminary data showed that exports of goods increased by 2.5% over the month, while imports of goods increased by only 0.7%. Economists believe that in the second half of this year, trade will become a neutral factor for overall GDP growth, as domestic demand is likely to worsen and negatively affect import flows.