The yield on US Treasury bonds rose moderately, while market participants continue to assess economic data and their impact on the prospects for the Fed's monetary policy.
The yield on 5-year Treasury bonds increased by 3.4 basis points, reaching 4.251%, while the yield on 30-year bonds was 4.435% (+1.4 basis points). Meanwhile, the yield on 2-year Treasury bonds, reflecting expectations of short-term interest rates, increased by 3.7 basis points to 4.605%, while the yield on 10-year bonds increased to 4.263% (+2.3 basis points). The curve between the 10-year Treasury yield and the 2-year yield remains inverted, sending a warning that the economy may be falling or has already fallen into recession. Now the gap between 10 and 2 year U.S. debt is 34 basis points.
Yesterday's data showed that retail sales fell by 0.8% in January, while experts expected a decrease of only 0.1%. But this data was probably distorted by winter storms. A separate report showed that the initial jobless claims fell by 8,000, to 212,000, in the week ended February 10. This is further evidence that the U.S. labor market remains tight. Investors have been closely watching economic data for hints about whether the economy is easing, which could hint at interest rate cuts beginning soon. Fed officials have repeatedly stated that their decisions will be made based on data. According to the CME FedWatch Tool, markets see a 8.5% probability of a 25 basis point rate cut at the Fed meeting in March and a 32.9% probability of a rate cut in May, with 94 basis points of cuts priced in for this year (nearer to Fed's own projection of 75 basis points of easing).
Today, investors will focus on January producer price data, the January housing market report, as well as the Reuters/Michigan consumer sentiment index for February. Consensus estimates suggest that producer prices increased by 0.1% over the month and by 0.6% per annum, while the consumer sentiment index increased to 80 points from 79 points in January.