U.S. Treasury bond yields declined significantly as market participants reacted to the results of the Fed's December meeting, which increased the likelihood that the Central Bank may move to monetary policy easing in 2024.
The yield on 5-year Treasury bonds fell by 11.8 basis points, reaching 3.885%, while the yield on 30-year bonds was 4.123% (-6.1 basis points). Meanwhile, the yield on 2-year Treasury bonds, reflecting expectations of short-term interest rates, decreased by 14.9 basis points to 4.332%, while the yield on 10-year bonds fell to 3.951% (-8.0 basis points), falling below 4% for the first time since early August. 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 38 basis points.
Following the results of the December meeting, the Fed left interest rates unchanged, but signaled that three 0.25% rate cuts could be implemented next year. Further rate cuts are also expected during 2025 and 2026, as a result of which the rate will be in the range of 2%-2.25%. The Fed also lowered its inflation forecast for 2024 from 2.6% to 2.4%. Fed officials see core inflation falling to 3.2% in 2023 and 2.4% in 2024, then to 2.2% in 2025. Finally, it gets back to the 2% target in 2026. Meanwhile, the GDP growth forecast for 2023 was raised by 0.5% to 2.6%. Officials see GDP at 1.4% in 2024, roughly unchanged from the previous outlook. At the same time, Fed Chairman Powell said that the latest data indicate that "the growth of economic activity has slowed significantly compared to the excessive pace observed in the third quarter. Even so, GDP is on track to expand around 2.5% for the year as a whole”.
Today, investors will focus on retail sales data for November, as well as the weekly labor market report. Economists expect retail sales to grow by 2.1% per annum, slowing compared to October (+2.5%), while initial jobless claims increased by 220 thousand, the same as the week before.