The Treasury Yields Rise Ahead of This Week's Inflation and Retail Sales Data

Yields on U.S. government bonds edged slightly higher on Monday morning as traders prepared for a week filled with significant U.S. economic reports that could influence market movements.

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Current Market Situation

The yield on the 2-year Treasury note rose by 1.5 basis points to 4.069%, up from 4.054% at the close of Friday’s session. This increase brought the 2-year yield to its highest level since August 1, according to data from Dow Jones Market Data. Meanwhile, the 10-year Treasury yield increased by 2 basis points to 3.963%, compared to 3.943% on Friday. The 30-year Treasury yield also saw a rise, climbing 1.8 basis points to 4.244% from Friday’s 4.226%.

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Market Drivers

Investors are bracing for several key economic data releases this week, which could have a substantial impact on market sentiment. The most anticipated reports include Tuesday’s producer price index (PPI) for July, Wednesday’s consumer price index (CPI) for the same month, and Thursday’s retail sales data for July, along with the weekly jobless claims report.

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These reports are expected to provide insights into the health of the U.S. economy, particularly whether it is showing signs of slowing down and if inflation is cooling sufficiently to justify potential interest rate cuts by the Federal Reserve. The outcome of these reports could shape the market's expectations for future monetary policy decisions.

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Changing Market Expectations

Just a week ago, concerns over a potential U.S. recession led to a sharp decline in global equities. This spurred traders in fed-funds futures to price in an 85% probability that the Federal Reserve would cut interest rates by 50 basis points, reducing the target range from 5.25% to 5.5%, by September. However, this probability has since declined to 48.5%, with a 25-basis-point cut now seen as more likely, with a 51.5% chance.

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The 10-year Treasury yield, which had dipped to 3.782% last Monday—its lowest level in nearly a year—has rebounded to around 3.96%. This recovery was supported by better-than-expected economic data released last week, which prompted some investors and traders to reassess their expectations for a potential recession.

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Expert Commentary

Viktor Shvets, head of global desk strategy at Macquarie Capital, provided his perspective on the current market conditions. He described recent volatility as more akin to a "heart palpitation" rather than a "cardiac arrest," suggesting that the recent market fluctuations do not signal a fundamental break from established liquidity and investment strategies. According to Shvets, while there may be aftershocks that reveal vulnerabilities, the broader market environment remains resilient.

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Shvets also addressed concerns about a potential slowdown in the U.S. economy. While he acknowledged that the economy is slowing, he argued that fears of an imminent recession are exaggerated. He believes that the Federal Reserve is indeed behind the curve in terms of policy adjustments, but this lag is not particularly consequential. Shvets emphasized that the U.S. economy is supported by strong fundamentals, excess capital, and a robust policy toolkit that can quickly reverse negative trends with minimal damage.

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In his view, investors are currently operating in a "twilight" phase, where there is neither a full-blown recession nor a strong economic recovery. This environment is characterized by lower interest rates and higher liquidity, which continue to support the market despite the lack of strong economic growth.

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As the week progresses, the market will be closely watching the upcoming economic reports for any signs of change in the U.S. economic outlook. The data could either reinforce current expectations of a modest economic slowdown or prompt a reevaluation of the likelihood of a recession and the Federal Reserve’s potential response.

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In the meantime, U.S. Treasury yields are likely to remain sensitive to any new information that emerges, as traders adjust their positions based on the evolving economic landscape.

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