Bond traders are turning their attention to the latest reading on inflationary pressures in the US economy as concern mounts the recent selloff has further to run.
Producer price growth is expected to have decelerated to 0.6% in January from 1% in December, according to a survey of economists surveyed by Bloomberg. Earlier this week, a higher-than-forecast consumer inflation reading sent bonds tumbling and cast doubt over the Federal Reserve’s ability to cut interest rates rapidly.
Another surprise could deal a fresh blow, sending Treasury yields back to the highest levels of the year reached earlier this week. The 10-year rate was three basis points higher in early European trading hours, at 4.26%.
In addition to the producer price index, US data to be released Friday include January housing starts and February preliminary findings of the University of Michigan’s consumer sentiment survey. Together, the prints will help determine whether the US economy is still running too hot for comfort.
“PPI and University of Michigan sentiment numbers are going to be key,” said Althea Spinozzi, head of fixed income strategy at Saxo Bank A/S. She expects US 10-year yields to extend their weekly run of increases through to the end of the month when the January PCE deflator will be published. “That could be the game changer.”
Market bets on the scope and timing of the Fed easing cycle whipsawed this week on mixed US economic data. Traders scrapped wagers on a first cut before June following Tuesday’s inflation report, only to add them back after weak retail sales data restored the case for earlier easing.
Swaps are currently pricing 90 basis points of Fed policy easing this year, around 20 basis points less than at the start of the week. Just two weeks ago, bets were on around 150 basis points of cuts. The first move is seen in June.
“The FOMC is unlikely to start lowering interest rates until inflation data is much closer to target,” Mark Dowding, CIO at RBC BlueBay Asset Management, wrote in a note. “Rate cuts are only likely in the second half of 2024.”
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