Bond yields were little changed early Tuesday as traders kept their powder dry ahead of a crucial U.S. consumer price inflation report.<\/p>\n
What\u2019s happening<\/h2>\n\n- \n The yield on the 2-year Treasury
\n BX:TMUBMUSD02Y<\/a>
\n slipped 2.1 basis points to 4.472%. Yields move in the opposite direction to prices.<\/p>\n<\/li>\n- \n The yield on the 10-year Treasury
\n BX:TMUBMUSD10Y<\/a>
\n fell 1.1 basis points to 4.177%.<\/p>\n<\/li>\n- \n The yield on the 30-year Treasury
\n BX:TMUBMUSD30Y<\/a>
\n eased less than 1 basis point to 4.381%.<\/p>\n<\/li>\n<\/ul>\nWhat\u2019s driving markets<\/h2>\n
The Bureau of Labor Statistics will publish U.S. consumer price index data for January at 8:30 a.m. Eastern.<\/p>\n
\nHeadline annual CPI inflation is forecast to have fallen from 3.4% in December to 2.9% last month, the lowest since March 2021. The core annual rate \u2014 which strips out volatile items like food and energy \u2014 is expected to drop from 3.9% to 3.7%.<\/p>\n
Month-on-month the headline rate is forecast to dip from 0.3% in December to 0.2% in January, but for the core to remain at 0.3%.<\/p>\n
The data \u201cwill likely set the tone for financial markets over the next two weeks, until the January PCE deflator release on Feb. 29,\u201d said Stephen Stanley, chief U.S. economist at Santander.<\/p>\n
If the report matches expectations or is lower than forecast then traders may consider a rate cut by the Federal Reserve in May is more likely.<\/p>\n
Currently, markets are pricing in an 86.5% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on March 20th, according to the CME FedWatch tool.<\/p>\n
The chances of at least a 25 basis point rate cut by the subsequent meeting in May is priced at 54.7%. The central bank is expected to take its Fed funds rate target back down to around 4.31% by December 2024, according to 30-day Fed Funds futures.<\/p>\n
Elsewhere, there was a reminder from the U.K. that inflationary pressures can stick around. Britain\u2019s Office for National Statistics said that average weekly wages, including bonuses, rose 5.8% in the year to December, higher than forecasts of 5.6%. <\/p>\n
The uptick in earnings inflation came as the U.K. labor market tightened, with the unemployment rate falling from a revised 4.2% in November to 3.8% in December. The pound
\n GBPUSD,
\n -0.29%<\/bg-quote><\/a>
\n rose and the U.K. 2-year government bond yield climbed 3.3 basis points to 4.091%.<\/p>\nWhat are analysts saying<\/h2>\n
\u201cLast week, Fed officials across the hawk-dove spectrum mostly reiterated Chair Powell\u2019s messages from the January FOMC meeting: they are encouraged by the recent progress on inflation but need to see more data to gain confidence that inflation is trending sustainably to 2%,\u201d said Deutsche Bank economists led by Amy Yang.<\/p>\n
\u201cThese comments, alongside the strong January payroll data as well as the marginal impact from the CPI seasonal factor revisions, are consistent with our Fed view for the first cut to begin in June and 100bps of total reductions to be delivered this year,\u201d the Deutsche Bank team added.<\/p>\n<\/p><\/div>\n<\/div>\n
\n BX:TMUBMUSD02Y<\/a>
\n slipped 2.1 basis points to 4.472%. Yields move in the opposite direction to prices.<\/p>\n<\/li>\n
\n BX:TMUBMUSD10Y<\/a>
\n fell 1.1 basis points to 4.177%.<\/p>\n<\/li>\n
\n BX:TMUBMUSD30Y<\/a>
\n eased less than 1 basis point to 4.381%.<\/p>\n<\/li>\n<\/ul>\n
What\u2019s driving markets<\/h2>\n
The Bureau of Labor Statistics will publish U.S. consumer price index data for January at 8:30 a.m. Eastern.<\/p>\n
Headline annual CPI inflation is forecast to have fallen from 3.4% in December to 2.9% last month, the lowest since March 2021. The core annual rate \u2014 which strips out volatile items like food and energy \u2014 is expected to drop from 3.9% to 3.7%.<\/p>\n
Month-on-month the headline rate is forecast to dip from 0.3% in December to 0.2% in January, but for the core to remain at 0.3%.<\/p>\n
The data \u201cwill likely set the tone for financial markets over the next two weeks, until the January PCE deflator release on Feb. 29,\u201d said Stephen Stanley, chief U.S. economist at Santander.<\/p>\n
If the report matches expectations or is lower than forecast then traders may consider a rate cut by the Federal Reserve in May is more likely.<\/p>\n
Currently, markets are pricing in an 86.5% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on March 20th, according to the CME FedWatch tool.<\/p>\n
The chances of at least a 25 basis point rate cut by the subsequent meeting in May is priced at 54.7%. The central bank is expected to take its Fed funds rate target back down to around 4.31% by December 2024, according to 30-day Fed Funds futures.<\/p>\n
Elsewhere, there was a reminder from the U.K. that inflationary pressures can stick around. Britain\u2019s Office for National Statistics said that average weekly wages, including bonuses, rose 5.8% in the year to December, higher than forecasts of 5.6%. <\/p>\n
The uptick in earnings inflation came as the U.K. labor market tightened, with the unemployment rate falling from a revised 4.2% in November to 3.8% in December. The pound \u201cLast week, Fed officials across the hawk-dove spectrum mostly reiterated Chair Powell\u2019s messages from the January FOMC meeting: they are encouraged by the recent progress on inflation but need to see more data to gain confidence that inflation is trending sustainably to 2%,\u201d said Deutsche Bank economists led by Amy Yang.<\/p>\n \u201cThese comments, alongside the strong January payroll data as well as the marginal impact from the CPI seasonal factor revisions, are consistent with our Fed view for the first cut to begin in June and 100bps of total reductions to be delivered this year,\u201d the Deutsche Bank team added.<\/p>\n<\/p><\/div>\n<\/div>\n
\n GBPUSD,
\n
\n rose and the U.K. 2-year government bond yield climbed 3.3 basis points to 4.091%.<\/p>\nWhat are analysts saying<\/h2>\n