The Treasury market has seen a sharp sell-off since Friday's strong nonfarm payrolls report as bets that the Federal Reserve will cut interest rates by another 50 basis points in November were abandoned. Now bond traders are turning to the key inflation report for clues about the pace of future Fed rate cuts.
While Kim Rupert, an economist at Action Economics, expects the data to be "mild," "that's not to say we won't be surprised." Obviously, an unexpected upside in CPI data following the jobs report could exacerbate the bearish reaction.
Consensus forecasts compiled by Bloomberg show consumer prices excluding food and energy components, or core CPI, rising at an annualized rate of 3.2% last month. That remains above the Fed’s 2% target.
Michael de Pass at Citadel Securities said he expects the Fed to cut rates by only another 25 basis points this year, given persistent inflation and a remaining resilient U.S. economy.
“We end up with a situation where inflation remains elevated, above target, while the pace of easing is slower than markets expected,” de Pass said.
Traders in futures markets tied to the secured overnight funding rate have been unwinding their long positions since Friday. Meanwhile, some short positions have emerged as expectations for aggressive rate cuts from the Federal Reserve fade.
Swap market pricing means traders are less certain the Fed will cut rates in November, and they no longer see a cumulative 50 basis point cut in the remainder of 2024.
In the options market, new positioning favors a scenario in which the Fed cuts rates by just 25 basis points at its November meeting and then keeps its policy rate unchanged in December.
Minutes of the Federal Reserve's September meeting released on Wednesday showed that Fed Chairman Jerome Powell faced some resistance in cutting interest rates by 50 basis points, with some officials preferring a 25 basis point cut.
Treasuries have fallen 1.3% so far in October, according to a Bloomberg gauge, coming to an end a five-month rally. Also Thursday, markets will digest a third round of Treasury auctions, including a sale of 30-year bonds. Wednesday saw a $39 billion auction of 10-year notes and a day earlier a $58 billion auction of three-year notes.
Jupiter Asset Management is sticking with its “high confidence” in the government bonds held by its flagship fund, even as renewed optimism about the U.S. economy pushes up global bond yields.
“The data beneath the surface is not that healthy and history suggests that any deterioration could lead to another sharp drop in yields,” said Matthew Morgan, the firm’s head of fixed income.
“Today, the market is pricing in a soft landing for the U.S. economy with no sign of a worse outcome,” he said in an interview. “Every time we’ve had this happen historically, the end result has been a harder landing than expected.”
He said the firm was sticking with its flagship strategy in U.S. Treasuries, U.K. gilts and Australian dollar bonds as it prepared for a medium-term slowdown in global economic growth.
While some of Jupiter’s absolute return strategies have “modestly cut” bond exposure as a result, Morgan remains confident that inflation will continue to slow, noting that outside the U.S., growth is weak in Europe and many emerging markets.
“One nonfarm payrolls report can never tell you much,” he said. “The private sector’s contribution to job growth has been below what we would consider a healthy economy. That should be a cause for concern.”
The article is forwarded from: Jinshi Data
