The latest U.S. October Consumer Price Index (CPI) data aligned with market expectations, leading to increased anticipation of a Federal Reserve rate cut. This has led to a rebound in short-term U.S. Treasury bonds. The yield on two-year Treasury notes fell by about 6 basis points to 4.296%, indicating a closer tie to Federal Reserve rate decisions.
Traders have raised the probability of a December rate cut by the Federal Reserve from around 58% to approximately 80%, despite the CPI data only meeting expectations. The report helped alleviate concerns over inflation prospects following the presidential election. Bond traders had previously lowered their expectations for further rate cuts over the next year.
The U.S. Labor Department reported that October CPI rose by 2.6%, halting a six-month decline, with core CPI remaining steady at 3.3%. This data suggests inflation is nearing pre-pandemic levels, prompting discussions on reducing key expenses like housing and healthcare.
Rick Rieder, Chief Investment Officer of Global Fixed Income at BlackRock, mentioned that while the overall report aligns with the Fed's inflation target trajectory, the rate of improvement has slowed in some sectors. The market reacted positively, with expectations that core CPI will enable the Fed to cut rates again in December.
Discussion centers on whether the Fed will slow the pace of rate cuts in early next year, considering strong consumer spending and stable hiring. Federal Reserve Chairman Jerome Powell highlighted the lingering effects of past price increases, particularly in rental costs, rather than new price pressures.
Bond market reactions were mixed; longer-term Treasury yields saw a slight rise following the CPI data release. A surge in corporate bond issuance contributed to the rise in 10-year and 30-year Treasury yields, up by 2.2 and 6.4 basis points, respectively.
Market participants remain cautious about long-term rate cuts due to fiscal and trade policy uncertainties. While December rate cut expectations have strengthened, concerns about future rate cuts, particularly next year, persist. Some experts believe long-term yields may eventually follow short-term yields downwards.
