Treasury Yields Slip Ahead of Retail Sales Report

Treasury yields rose on Friday morning, driven by stronger-than-expected U.S. retail sales data, a sharp increase in manufacturing activity in New York state, and indications from Federal Reserve officials that rate cuts may not be imminent.

‍

Market Overview

• The yield on the 2-year Treasury climbed to 4.367%, marking a 6.8-basis-point increase from Thursday's 4.299%.
• The 10-year Treasury yield rose to 4.485%, up 6 basis points from the previous day's 4.425%.
• The 30-year Treasury yield advanced to 4.639%, gaining 5 basis points compared to Thursday's 4.589%.

Key Drivers Behind the Moves

Resilient Retail Sales

Data released on Friday revealed that retail sales increased by 0.4% in October. This steady pace of growth signals continued momentum in the U.S. economy, defying expectations of a slowdown in consumer activity.

‍

New York Manufacturing Surge

The Empire State business conditions index, which measures manufacturing activity in New York, saw a dramatic increase. The index surged by 43.1 points in November to reach 31.2, its highest reading in nearly three years. This unexpected spike indicates robust activity in the region’s manufacturing sector, adding to the narrative of economic resilience.

‍

Federal Reserve Commentary

On Thursday, Federal Reserve Chair Jerome Powell suggested that the central bank is not in a rush to cut interest rates, dampening earlier expectations for a potential December rate reduction. Supporting this stance, Boston Fed President Susan Collins told The Wall Street Journal in an interview that a rate cut in December is “not a done deal.” These comments reinforced the perception that the Fed may maintain a cautious approach to monetary policy adjustments in the near term.

‍

Shift in Market Expectations

In response to Powell’s comments and Collins’ interview, traders adjusted their outlook for the Fed’s December meeting. According to the CME FedWatch Tool:

• The probability of no action by the Federal Reserve next month rose to 45%, up from 27.8% just a day earlier.
• The odds of a quarter-point rate cut, which would bring the federal funds rate target to a range of 4.25% to 4.5%, stood at 55%.

‍

Implications for Treasury Yields

Treasury yields often respond to economic data and shifts in Federal Reserve expectations because these factors influence investor sentiment about future interest rates. The stronger-than-anticipated retail sales and manufacturing data suggest that the economy remains robust, which may reduce the urgency for the Fed to cut rates. Consequently, yields moved higher as investors adjusted their positions to reflect a more hawkish outlook.

‍

The rise in yields was broad-based, with short-term and long-term maturities experiencing gains. The increase in the 2-year yield, which is closely tied to expectations for Fed policy, reflects heightened uncertainty about the timing of rate cuts. Meanwhile, the 10-year and 30-year yields, which are more influenced by long-term growth and inflation expectations, also climbed as the market processed the latest data.

‍

Outlook

The combination of strong economic indicators and cautious messaging from the Federal Reserve highlights the ongoing balancing act between addressing inflation risks and supporting economic growth. While the retail sales and manufacturing data point to resilience, they also raise questions about whether the Fed might need to hold rates steady for longer than previously anticipated.

‍

The market will likely remain sensitive to upcoming economic releases, including inflation data and employment figures, as these will provide further clues about the direction of Fed policy. For now, the higher yields reflect a recalibration of expectations amid mixed signals about the strength of the U.S. economy and the central bank’s intentions.

‍