Bond traders amped up wagers that the Federal Reserve will be cutting interest rates before the end of this year after a report signaled easing inflation pressures.
(Bloomberg) — Bond traders amped up wagers that the Federal Reserve will be cutting interest rates before the end of this year after a report signaled easing inflation pressures.
Swaps linked to Fed meetings showed the odds of a quarter-point hike next month coming down to a little over 70% from around 80% before the consumer-price index was released. Those bets spurred a rally in Treasuries, led by shorter-term maturities, sparking a steepening of the yield curve and sending the rate on two-year notes tumbling as much as 15 basis points to 3.87%.
Swap pricing also showed expectations for the effective fed funds rate in December to be about a half point below the current 4.83% level.
“Inflation is still high, but it has peaked and if shelter is turning, some of the pressure on the Fed to keep hiking will decline,” said Priya Misra, global head of rates strategy at TD Securities, which is currently long 10-year Treasury notes. “The rates market is reacting to a weaker headline print,” which is being driven by declines in key measures of shelter inflation, she added.
The year-on-year CPI measure fell to 5% from 6%. That was below an average analyst estimate of 5.1%. A core measure that strips out food and energy came in at 5.6%, up from the prior month reading of 5.5%, but in line with economist estimates.
Bond traders will be looking next to the minutes of the latest Federal Open Market Committee meeting due at 2 p.m. in Washington.
“Today’s CPI takes some heat off the Fed,” said Ronald Temple, chief market strategist at Lazard in New York. “Moderating price pressures combined with signs of cooling in the labor market will offer a temporary reprieve to markets. While this is good news, it does not mean tightening is over.”
And not everyone is buying into trader wagers on Fed easing later this year.
Rate cuts are especially unlikely in 2023 if the economy proves to slow only gradually, said Jay Bryson, chief economist at Wells Fargo & Co.
“If we have a soft landing, I could see the inflation rate getting stuck at 3 to 3.5%,” Bryson said on Bloomberg Television Wednesday. And if the Fed still needs to get inflation “back down to 2% you are not going to see rate cuts by the end of the year. So, I have a bit of as disagreement where the 2-year yield is right now.”
–With assistance from Michael Mackenzie.
(Updates rates throughout, adds analyst comment and chart.)
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