An Initial Barrage of Economic Reports Leads to a Decline in the 10-year Treasury Yield

On Thursday morning, U.S. government bond yields were slightly lower, although the 10-year Treasury yield remained near its highest level since early September. Investors were assessing a range of fresh economic data while awaiting remarks from Federal Reserve Chair Jerome Powell at the annual Treasury market liquidity conference.

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Market Update:

• The yield on the 2-year Treasury increased by 2 basis points to 3.58%.
• The 10-year Treasury yield dropped by 1 basis point to 3.78%.
• The 30-year Treasury yield decreased by 2 basis points, landing at 4.12%.

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Market Influences:

The Treasury market appeared relatively calm in the morning, even as risk assets surged due to optimism about potential economic stimulus in China and hopes for a ceasefire between Israel and Hezbollah. The prospect of a stronger Chinese economy possibly spurring global growth—and perhaps heightening inflationary pressures—was tempered by a 2% drop in oil prices. This decline followed reports that Saudi Arabia had given up on its goal of achieving $100 per barrel for crude oil.

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Adding to the mix of market drivers, traders were gearing up for key economic data expected in the coming days. Notably, the personal consumption expenditures price index (PCE) for August, which is the Federal Reserve’s preferred inflation measure, was due for release on Friday.

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Early U.S. economic data showed that the gross domestic product (GDP) for the second quarter remained unchanged at 3.0%, primarily driven by government and consumer spending. Additionally, orders for durable goods in the U.S. were flat for August, but this was seen as better than the decline that Wall Street had anticipated. Meanwhile, jobless claims hit a four-month low, highlighting a trend where employers have shown caution in both hiring and firing.

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Jim Baird, Chief Investment Officer at Plante Moran Financial Advisors, commented on the revised GDP data, noting that while it’s old news, it effectively rounds out the economic picture for the first half of the year.

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Thursday was filled with several scheduled events that had the potential to move markets:

• At 9:25 a.m., New York Federal Reserve President John Williams was scheduled to speak at the Treasury conference.
• At 10:00 a.m., the U.S. pending home sales data for August was set to be released.
• At 10:30 a.m., Fed Vice Chair for Supervision Michael Barr was expected to deliver remarks at the Treasury conference, and Fed Governor Lisa Cook was due to participate in a technology roundtable.
• At 1:00 p.m., results were to be released for a $44 billion auction of 7-year Treasury notes.
• Also at 1:00 p.m., Minneapolis Federal Reserve President Neel Kashkari was scheduled to have a conversation with Vice Chair Barr regarding banking supervision and inclusive lending.

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Fed Rate Expectations:

Following the release of Thursday morning’s economic data, traders revised their expectations for the Federal Reserve's upcoming interest rate decision. According to the CME FedWatch tool, there was now a slightly lower probability (56.1%) that the Fed would reduce interest rates by 50 basis points from the current range of 4.75% to 5.00% at its next meeting scheduled for November 7. Earlier in the morning, the probability was closer to 62%, indicating some uncertainty among investors about the Fed’s next move.

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Inflation Concerns and Market Sentiment:

As the market braced for Friday’s key inflation data, Stephen Innes, Managing Partner at SPI Asset Management, pointed out that investors were leaning toward a cooler inflation reading. The expectation was for a sub-trend figure, which would indicate that inflation might be easing.

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However, Innes raised a critical question: Is there enough slack in the economy for inflation to fall to the Federal Reserve’s 2.0% target? Or could the recent surge in economic growth reignite inflationary pressures? The Fed has provided economic support, but there is still a concern that it may come with inflationary side effects in the future.

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This sentiment reflects broader market worries about whether the Fed’s actions to stabilize the economy, particularly through rate cuts, might ultimately lead to rising inflation down the line.

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Broader Market Reactions:

On Thursday, the S&P 500 and Dow Jones Industrial Average experienced gains following the release of several economic reports. These reports included solid second-quarter GDP growth at 3%, as well as indications that employers were reluctant to make significant changes to their hiring or firing practices. The Nasdaq Composite Index also rose by 1%, according to data.

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This market optimism comes amid continued debate over the strength of the economy, inflation prospects, and how the Federal Reserve’s actions will shape future economic outcomes. Investors are navigating a landscape marked by a mix of encouraging economic data and persistent uncertainty about whether inflation will remain under control.

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In summary, U.S. Treasury yields showed little movement on Thursday, while investors processed both fresh economic data and upcoming announcements from key Federal Reserve figures. Traders are closely watching the Fed’s next moves, especially with significant inflation data due to be released soon. Amid positive signs of economic growth, the market remains cautious about inflationary risks and the potential for future volatility driven by shifts in Federal Reserve policy.

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