Bond Yields Fall Ahead of Federal Reserve Minutes

Overview

Yield Movement

Here are the key movements in bond yields:

• The yield on the 2-year Treasury (BX:TMUBMUSD02Y) slipped by 5.5 basis points to 4.906%. Remember, yields have an inverse relationship with prices.
• The yield on the 10-year Treasury (BX:TMUBMUSD10Y) retreated 4.2 basis points to 4.176%.
• The yield on the 30-year Treasury (BX:TMUBMUSD30Y) fell 1.5 basis points to 4.304%.

Factors at Play

The primary focus for traders on Wednesday revolves around the release of the Federal Reserve’s minutes from its July rate-setting meeting at 2 p.m. Eastern.

Traders are particularly interested in gaining additional insights into the central bank’s stance on interest rates. This curiosity stems from the fact that despite inflation levels remaining above the 2% target, recent data suggests that the economy has yet to succumb to higher borrowing costs.

According to the CME FedWatch tool, market expectations currently indicate a 91% probability that the Fed will maintain interest rates unchanged within a range of 5.25% to 5.50% following its next meeting on September 20.

Moreover, there is a 30% chance that a rate hike of 25 basis points will occur during the subsequent meeting in November, which would shift the range to 5.50% to 5.75%.

It is important to note that analysts do not anticipate the central bank to reduce its Fed funds rate target to around 5% until June 2024, as projected by the 30-day Fed Funds futures.

In conclusion, bond yields have experienced a decline as markets anxiously await the Federal Reserve’s minutes. Traders are eager to gain insights into the central bank’s stance on interest rates in light of the economy’s response to higher borrowing costs and inflation levels.

U.S. Economic Updates: Housing Starts and Building Permits

On Wednesday, some key economic updates are set to be released in the United States. These updates include the data on housing starts and building permits for the month of July. The release is scheduled for 8:30 a.m. This will provide insights into the current state of the housing market, which plays a crucial role in the overall health of the economy.

Industrial Production and Capacity Utilization

Additionally, at 9:15 a.m., the industrial production and capacity utilization numbers for July will be made available. This data is essential in assessing the level of output and utilization of resources within the manufacturing sector. It gives an indication of the overall strength of industrial activity in the country.

Inflation Update from the U.K.

While focusing on Europe, there has been positive news regarding inflation in the United Kingdom. The headline annual consumer price growth for July has eased to 6.8%, down from 7.9% in the previous month. However, it is worth noting that the 10-year gilt yield BX:TMBMKGB-10Y has risen by 1.4 basis points to 4.605%. Traders have observed that core inflation remains at 6.9%. Consequently, there is a growing expectation that the Bank of England will raise interest rates to 6% during this cycle.

Analyst Perspectives

Experts at Nationwide Financial have analyzed the latest U.S. retail sales data, and their observations shed light on the state of the economy amidst Fed rate hikes.

According to Nationwide Financial, “A strong July for consumer spending is another sign that the economy has shifted into a faster gear rather than hit the brakes. We expect well-above 3.0 percent annualized real GDP growth in the third quarter — an acceleration in growth from the first half of 2023 despite the headwinds from higher interest rates.”

They also cautioned, “While there is increasing optimism for a ‘no landing’ or a soft landing in the near term, the continued stronger data may lead to more rate hikes from the Fed at upcoming meetings, raising the odds of a hard landing in 2024.”

These insights from Nationwide Financial underscore the complex dynamics at play in the current economic landscape. It is crucial to monitor these updates closely to gain a comprehensive understanding of the U.S. economy’s trajectory and its potential implications for various sectors.