Bond traders are anticipating a fresh dose of inflation data on Wednesday that could determine whether Federal Reserve officials cut or hold interest rates next week.
A mixed November jobs report helped send two-year US Treasuries lower for two straight weeks, and traders later raised the odds of a December rate cut to nearly 80% – but the reading on consumer prices in November remains crucial.
“This time, the CPI is more important than the payroll data,” said John Madzer, senior portfolio manager at Vanguard, adding that recent jobs numbers have been distorted by the effects of hurricanes and labor strikes.
The yield on two-year US Treasury bonds rose by two basis points to 4.16% in early trading on Wednesday.
Madzer said the October report surprised everyone, and that overall it was “moving away” from the Fed’s 2% inflation target.
He added: “If we get any sign that it will decline further, the Fed may seriously consider stopping in December.”
“Inflation is likely to be more disruptive,” said Brett Parker, co-head of global interest rates at TCW Group, which holds two- to five-year U.S. Treasuries.
The median forecast from a recent Bloomberg poll expects core consumer prices — considered the best measure of core inflation — to rise 0.3% in November, at the same pace as the previous month. This would put the annual price growth rate at 3.3%.
Investors took a volatile stance. A weekly JPMorgan Chase & Co. survey on Tuesday showed that bank clients had shifted to neutral on Treasuries from the strongest long-term bias this year, pulling back after a three-week rally. The yield on ten-year Treasury bonds settled at 4.22%.
Before Fed officials entered a pre-meeting media blackout this week, most indicated they were relying on the data, even if they were leaning toward a rate cut in December and traders were pricing in a 20 basis point easing by the end of the year — and a cumulative 83 basis points. By the end of 2025.
