By What’s Happening
- The yield on the 2-year Treasury TMUBMUSD02Y, 4.734% slipped by 3.4 basis points to 4.730%. Yields move in the opposite direction to prices.
- The yield on the 10-year Treasury TMUBMUSD10Y, 3.762% retreated 2.7 basis points to 3.763%.
- The yield on the 30-year Treasury TMUBMUSD30Y, 3.875% fell 2.3 basis points to 3.876%.
What’s Driving Markets
Data from the U.K. reveals that consumer price inflation fell in June to a lower-than-expected 7.9% – its lowest level in over a year. This sparked a decrease in government bond yields not only in Europe but also in the U.S.
While this news may not typically have a significant impact on the broader market, global bond bulls are seizing it as further evidence that inflationary pressures, although still high in the U.K., are diminishing in developed economies such as the U.S. Consequently, this development adds weight to the expectation that central banks will soon halt their campaign of raising borrowing costs.
However, it is not yet time for central banks to rest. The markets are currently foreseeing a 99.8% probability that the Fed will increase interest rates by 25 basis points to a range of 5.25% to 5.50% after their meeting on July 26, according to the CME FedWatch tool.
As for future rate hikes, the odds of an additional 25 basis point increase to 5.5% to 5.75%, occurring after the September or November meetings, currently stand at 12% and 25% respectively.
The Central Bank and U.S. Economic Updates
The central bank is not expected to lower its Fed funds rate target back down to around 5% until April 2024, as predicted by 30-day Fed Funds futures.
Economic Updates
On Wednesday, several U.S. economic updates will be released, including housing starts and building permits for June. These updates are scheduled for 8:30 a.m. Eastern.
Analysts’ Perspectives
Stephen Innes, managing partner at SPI Asset Management, discusses the emerging evidence regarding U.S. growth and inflation:
- Growth Potential: Evidence suggests that U.S. growth may remain strong despite subsiding inflation. Factors such as reduced headwinds from monetary and fiscal policy tightening, robust consumer income growth, and signs of improvement in the housing and manufacturing sectors indicate that positive growth impulses could outweigh the drag from reduced bank lending in the coming months.
- Supply-driven Inflation: In this economic cycle, supply plays a crucial role in driving inflation. Therefore, a soft landing cannot occur without the return of supply. Fortunately, recent developments have provided encouraging news in this regard.
- Diminishing Inflation: Measures of bottleneck inflation have not only reversed the spike caused by COVID but are now at their lowest level since records began in the mid-1990s. This decline is further supported by other indicators like China’s producer prices and the price component of the PMIs, which also show deflationary trends.
In summary, while inflation appears to be subsiding, positive growth impulses, driven by factors such as consumer income growth and improving sectors, might outweigh the impact of reduced bank lending in the foreseeable future. The role of supply in driving inflation is a key differentiator in this economic cycle, and recent data suggests a positive outlook for a soft landing.
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