The yield on US Treasury bonds rose moderately, while market participants are preparing for the publication of the minutes of the December Fed meeting and US data, which may cause a reassessment of the prospects for monetary policy easing.
The yield on 5-year Treasury bonds increased by 2.3 basis points, reaching 3.947%, while the yield on 30-year bonds was 4.112% (+2.8 basis points). Meanwhile, the yield on 2-year Treasury bonds, reflecting expectations of short-term interest rates, rose by 1.9 basis points to 4.347%, while the yield on 10-year bonds increased to 3.969% (+2.5 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 38 basis points.
As for the data, investors' attention will be focused on labor market statistics. JOLTs job openings figures for November are out Wednesday, followed by ADP’s December private payrolls report on Thursday and nonfarm payroll data on Friday. Experts expect that in December the nonfarm payroll increased by 170 thousand. This will represent a slight slowdown compared to November (+199 thousand), but will be in line with the trend decline, albeit a bumpy one, in payrolls that has been in place since mid-2022. Meanwhile, the unemployment rate is projected to rise to 3.8% from 3.7%, and average hourly earnings increased by 0.3% mom. If the data points to further weakening of the economy, this may affect expectations regarding the timing of the Fed's interest rate cut. Meanwhile, the minutes of the Fed's December meeting may provide additional information on whether a recession in the United States can be avoided after an aggressive monetary tightening cycle.
According to the CME FedWatch Tool, markets see a 67.2% probability of a 25 basis point rate cut at the Fed meeting in March 2024 and a 97.4% probability of a rate cut in May 2024, with over 150 basis points of cuts priced in for this year.