Treasury yields hold just above seven-week lows ahead of U.S. producer price inflation data

“Treasury yields…are stabilizing after sizable declines in the previous session as traders surveyed the landscape for the next call for bonds to rally,” said Stephen Innes, managing partner at SPI Asset Management.

“But importantly, the ongoing tension between the market’s assumption that the Fed is done raising rates and the Committee’s insistence that another hike is still on the table  now appears to be settling in the market’s favor,” Innes added.

Markets are pricing in a 95% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on December 13th, according to the CME FedWatch tool.

And the chances of a 25 basis point rate cut at the May meeting is priced at 48%, up from 32% a month ago.

Bond investors will be hoping to see evidence that pipeline inflationary pressures are also easing when the producer prices report is released at 8:30 a.m. Eastern.

Other U.S. economic updates set for release on Wednesday include October retail sales data alongside the November Empire State manufacturing survey at 8:30 a.m. and the September business inventories report at 10 a.m.

Fed Vice Chair for Supervision Michael Barr testifies to the House Financial Services Committee at 9:30 a.m., and Richmond Fed President Tom Barkin will speak at 3:30 p.m.

More evidence that central banks are are having success in tackling inflation came from the U.K. on Wednesday. The 10-year U.K. gilt yield
BX:TMBMKGB-10Y
held near its lowest level since June after data showed consumer prices rose by a lower-than-expected 4.6% in the year to October, the slowest pace in two years.

What are analysts saying

“The [U.S.] economy’s path toward a more normal pace of price increases is clearer after the CPI report’s release. Reflecting this, bond markets are pricing in lower odds of the Fed making further interest rate increases at their next few monetary policy decisions, and higher odds of them cutting interest rates in 2024,” said Bill Adams, chief economist at Comerica Bank.

“Yields of longer-term bonds like the ten-year Treasury will likely fall less than two-year yields, since large fiscal deficits put upward pressure on the long end of the yield curve, and financial markets are likely to price in more optimism that the economy can return to normal rates of inflation and economic growth without a severe downturn,” Adams added.