U.S. Inflation Data Fails to Resolve Wall Street’s Questions as Treasury Market Sees 50% September Hike Odds
After a mild U.S. inflation report, traders are still holding hedges against the possibility that the Federal Reserve will raise interest rates at its September meeting. Market pricing currently shows roughly 50% odds of a hike. The consumer price index released Wednesday matched expectations, helping U.S. Treasuries extend their gains. The two-year Treasury yield, which is most sensitive to changes in Fed policy, fell 3 basis points to 4.18%. The benchmark 10-year yield also fell 3 basis points, to 4.65%. Later Wednesday, the U.S. Treasury was scheduled to auction $42 billion of 10-year notes. Interest-rate swaps showed that after the economic data were released, traders cut the probability of an October rate hike to about 60%, from roughly 75% the previous day. The market is fully pricing in the Fed taking its next step in December. “While this data should keep expectations of a September hike alive, it does not create a great deal of urgency for the Fed to act immediately,” said Steve Ryder, a senior fixed-income portfolio manager at Aviva Investors. “Policymakers may place greater emphasis on the next CPI report and labor-market data before deciding whether further policy tightening will be needed later this year.” Christopher Hodge, Natixis’ chief U.S. economist for North America, said: “The possibility of a surprise needs to be factored into every upcoming Fed meeting, but we still believe the Fed may narrowly avoid a rate hike against a backdrop of inflation gradually and slowly moving toward target, cooling consumption and a more fragile employment outlook.”
The consumer price index released Wednesday matched expectations, helping U.S. Treasuries extend their gains. The two-year Treasury yield, which is most sensitive to changes in Fed policy, fell 3 basis points to 4.18%. The benchmark 10-year yield also fell 3 basis points, to 4.65%. Later Wednesday, the U.S. Treasury was scheduled to auction $42 billion of 10-year notes.
Interest-rate swaps showed that after the economic data were released, traders cut the probability of an October rate hike to about 60%, from roughly 75% the previous day. The market is fully pricing in the Fed taking its next step in December.
“While this data should keep expectations of a September hike alive, it does not create a great deal of urgency for the Fed to act immediately,” said Steve Ryder, a senior fixed-income portfolio manager at Aviva Investors. “Policymakers may place greater emphasis on the next CPI report and labor-market data before deciding whether further policy tightening will be needed later this year.”
Christopher Hodge, Natixis’ chief U.S. economist for North America, said: “The possibility of a surprise needs to be factored into every upcoming Fed meeting, but we still believe the Fed may narrowly avoid a rate hike against a backdrop of inflation gradually and slowly moving toward target, cooling consumption and a more fragile employment outlook.”