Despite Above-forecast CPI Data, the Benchmark Treasury Yield Remains Above 4%

Treasury yields showed mixed movement on Thursday morning following the release of a slightly higher-than-expected September consumer-price index (CPI) and a notable increase in weekly jobless claims.

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Current Yield Movements

‍The yield on the 2-year Treasury dropped 4.6 basis points, falling to 3.969% from its previous level of 4.015% on Wednesday. On the other hand, the yield on the 10-year Treasury saw a slight increase, inching up to 4.069% compared to 4.065% the previous day, which was the highest closing level since July 31. Meanwhile, the yield on the 30-year Treasury rose 2.3 basis points, climbing to 4.361% from 4.338% on Wednesday.

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Thursday’s data release highlighted a slightly stronger-than-expected reading from the September CPI. The monthly CPI rate edged up to 0.2%, slightly higher than the anticipated 0.1%, while the core monthly rate, which excludes volatile food and energy prices, rose by 0.3% compared to the median economist forecast of 0.2%, according to a survey.

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On a yearly basis, the CPI report also came in above expectations. The year-over-year CPI rate stood at 2.4%, marginally above the projected 2.3%, and the core 12-month rate reached 3.3%, just above the anticipated 3.2%.

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In a separate report, initial jobless claims surged, reaching their highest level in over a year. The number of Americans filing for unemployment benefits jumped by 33,000, hitting 258,000 for the week ending October 5. Some analysts believe the spike may have been partly due to the effects of Hurricane Helene, as sharp increases in claims were observed in Florida and North Carolina.

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The 10-year Treasury yield remains above the 4% mark, a level not seen since July 31. This follows last Friday’s stronger-than-expected jobs report, which prompted a sell-off in long-term government bonds.

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In light of recent developments, traders in the federal funds futures market are now pricing in an 85% chance that the Federal Reserve will cut interest rates by 25 basis points on November 7. This would bring the rate down to a range of 4.75% to 5%. The remaining 15% of traders are anticipating no change in rates, according to the CME FedWatch Tool.

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Later on Thursday, investors are also awaiting the results of the Treasury Department’s $22 billion auction of 30-year bonds, which will be announced shortly after 1 p.m. Eastern Time.

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Market strategists offered some perspective on the latest inflation data. David Russell, global head of market strategy at TradeStation, noted that while the CPI report appeared slightly worrisome at first glance, it may not be as concerning upon closer inspection, largely due to a sharp slowdown in shelter costs. “Housing costs have been the biggest lingering issue for inflation,” Russell said, emphasizing that the deceleration in shelter prices could mitigate the overall inflation outlook.

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Russell added that although the data wasn’t particularly positive, it is unlikely to cause significant market disruption. “It’s not great news overall, but it’s also unlikely to have much impact because the Fed is still early in its easing cycle,” he stated. He also suggested that the days of CPI reports causing major market volatility could be diminishing.

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The broader market reaction reflects this more tempered outlook, as investors increasingly believe the Federal Reserve is gradually shifting into an easing cycle, which would entail cutting rates to stimulate the economy. Despite the slight uptick in inflation metrics, the overall sentiment is that the Fed is unlikely to deviate significantly from its current trajectory.

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The combination of softer shelter costs and expectations of future rate cuts gives markets some confidence that inflation is being managed, albeit slowly. While long-term Treasury yields remain elevated, the potential for rate cuts has kept investors relatively optimistic, particularly as the economy adjusts to higher borrowing costs and inflation begins to stabilize.

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In summary, Thursday’s mixed movements in Treasury yields reflect the ongoing balancing act between inflationary pressures and expectations for future Federal Reserve actions. Although the CPI data was slightly hotter than anticipated, the easing of shelter costs offers some relief. Additionally, the spike in jobless claims due to factors like the hurricane indicates some weakness in the labor market. Overall, market participants are closely watching how these variables will influence the Fed’s next steps, particularly regarding rate cuts, as the central bank continues to navigate its delicate monetary policy stance.

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