Treasury rates jump amid fresh inflation concerns

What’s happening

• The yield on the 2-year Treasury
  BX:TMUBMUSD02Y
  rose 4.6 basis points to 4.939% from 4.893% on Friday. Yields move in the opposite direction to prices.

• The yield on the 10-year Treasury
  BX:TMUBMUSD10Y
  was up 1.7 basis points at 4.183% from 4.166% Friday afternoon.

• The yield on the 30-year Treasury
  BX:TMUBMUSD30Y
  rose less than 1 basis point to 4.274% from 4.271% late Friday.

What’s driving markets

Monday’s increase in yields comes as investors remain concerned about the market’s ability to absorb $1 trillion of supply in the third quarter and as the annual core inflation rates from both the consumer price index and the Federal Reserve’s favorite measure, the PCE, remain above the central bank’s 2% target.

Observers saw reasons to be cautious about July’s consumer price index, which was released last Thursday. Then on Friday, the July producer price index came in hotter-than-expected.

Now, market participants are turning their attention to the months ahead, with bigger gains seen in store for gasoline prices. According to AAA, the national average price of regular gasoline is $3.851 a gallon as of Monday — up from $3.848 on Sunday, $3.829 a week ago, and $3.566 a month ago. Rising energy and food prices are likely to nudge inflation back up again.

With no major U.S. economic data due on Monday, investors will be looking ahead to updates later in the week, including the U.S. retail sales on Tuesday, the minutes of the Federal Open Market Committee’s July 25-26 meeting on Wednesday, and the leading economic indicators report on Thursday.

Markets are pricing in an 88.5% probability that the Fed will leave interest rates unchanged between 5.25%-5.5% on Sept. 20, according to the CME FedWatch Tool. The chance of a 25-basis-point rate hike to a range of 5.5%-5.75% at the subsequent meeting in November is priced at 37.8%.

The central bank is mostly expected to take its fed funds rate target back down to around 5% or lower next March or May.

What analysts are saying

“Our baseline forecast calls for the FOMC to start cutting the funds rate in 2024Q2 [the second quarter of 2024]. At that point, we expect core PCE inflation to have fallen below 3% year-on-year and below 2.5% on a monthly annualized basis. The motivation for cutting outside of a recession would be to normalize the funds rate from a restrictive level back toward neutral once inflation is closer to the target,” said Goldman Sach’s Jan Hatzius and others.

“Normalization is not a particularly urgent motivation for cutting, and for that reason we also see a significant risk that the FOMC will instead hold steady. The FOMC might not cut because inflation might not fall enough or, even if it does, because solid growth, a tight labor market, and a further easing of financial conditions might make cutting seem like an unnecessary risk,” they wrote in a note.