Yahoo Finance Treasuries Trim June Rally as Traders Eye PCE Data Ahead
(Bloomberg) -- Investors in the $27 trillion Treasury market are looking for signs of ebbing inflation in the Federal Reserve’s favored gauge to keep this month’s rally going.
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Treasuries have soared in June as traders re-calibrated their bets on the timing of lower interest rates in the US, sending a Bloomberg gauge of US bond returns higher for a second-straight month.
Ahead of Friday’s reading of the price index for personal consumption expenditures, or PCE, traders are pricing in some 44 basis points worth of monetary easing in 2024 — with some anticipating the first cut as soon as September.
Treasuries slipped in early trading Friday, lifting the yield on 10-year debt two basis points to 4.30%, while its two-year peer, which is more sensitive to changes in monetary policy, was little changed at 4.72%.
Yields have declined across the curve in June, with the 10-year down around 20 basis points. At Societe Generale, strategists led by Subadra Rajappa have said they expect the benchmark to head toward 4% by year’s end.
The slide in rates this month has come as investors scour economic data that supports Jerome Powell & Co. in easing.
A softer-than-expected rise in the consumer price index for May set off one of the biggest Treasury rallies of the year. The market edged higher on Thursday, too, amid reports that showed a jump in continuing claims for jobless benefits and fewer orders placed with factories for business equipment.
That sets the stage for the PCE figures at 8:30 a.m. New York time, which economists forecast will show evidence of ebbing price pressures.
“If realized, that will be a very welcome print for the Fed,” said Angelo Manolatos, a macro strategist at Wells Fargo Securities. “But they will need to see more good inflation reports in order to cut in September.”
Here’s what Bloomberg Economics says...
“The inflation pace will slow in May’s report, favorable news for the Fed. But with bottoms-up analysis pointing to disinflation stalling in months ahead, it will take swifter cooling in the labor market for the Fed to start cutting rates. With consumers showing more restraint amid rising unemployment, we think the door is still open for two rate cuts this year.”
— Stuart Paul and Estelle Ou, economists. Read more here.
While investors kicked off 2024 by pricing in about half-a-dozen, quarter-point rate cuts for the year, they’ve since reigned in those wagers to only fully price one.
Some traders in the options market linked to the Secured Overnight Financing Rate, though, have recently started to target two rate reductions this year before the December policy meeting and a more dovish policy outlook versus broader market pricing.
“Our house view is that the Fed will deliver the first rate cut in December,” Meghan Swiber, a US rates strategist at Bank of America Corp. “We have seen an improvement in services inflation figures recently, but the Fed will want to see more persistent improvement.”
Swiber is already looking ahead to a reading of employment data next week, which she said will be crucial for investors in gauging the Fed’s policy path ahead.
--With assistance from Edward Bolingbroke.
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