Treasury yields broadly dropped Thursday morning after U.S. data showed some signs of possible softening in the labor market and as traders considered the possibility of a policy mistake by the Federal Reserve.
Read: Markets anticipate threat of Fed ‘policy mistake’ after Powell pushes back on March rate cut
What’s happening
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The yield on the 2-year Treasury
BX:TMUBMUSD02Y
dropped less than 1 basis point to 4.221% from 4.227% on Wednesday. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
BX:TMUBMUSD10Y
fell 6.7 basis points to 3.898% from 3.965% on Wednesday. The rate was headed for its lowest level in at least a month. -
The yield on the 30-year Treasury
BX:TMUBMUSD30Y
slipped 8.5 basis points to 4.131% from 4.216% on Wednesday.
What’s driving markets
In data released on Thursday, initial jobless claims rose to an almost three-week high of 224,000 at the end of January, in what may be a sign of softening in the robust labor market.
Meanwhile, traders have pushed back on the timing of the Federal Reserve’s first interest rate cut in 2024, and now see a 95.9% chance of at least a quarter-point reduction by May. They still mostly expect the central bank to reduce borrowing costs this year by about 150 basis points, to between 3.75%-4% by December.
On Wednesday, Fed officials left their benchmark interest-rate target unchanged at between 5.25% and 5.5%. Chair Jerome Powell also seemed to take the possibility of a March rate cut off the table during his press conference.
From a market-moving perspective, analyst said, concerns about the banking system may have overshadowed the Fed. Treasury yields finished at their lowest levels in at least two weeks on Wednesday, suppressed by concerns about regional banks. Shares in New York Community Bancorp
NYCB,
plunged after the lender highlighted difficulties in commercial real estate.
The bond market began the week with four-week volatility on the 10-year yield settling into the fourth percentile versus the past three years — according to Bill Merz, the Minneapolis-based head of capital market research for U.S. Bank Wealth Management. This is a sign that investor expectations for Fed policy and inflation have stabilized as 2024 got under way, he said in an email to MarketWatch.
Friday brings the January nonfarm payrolls report, which is expected to produce 185,000 new jobs and a month-on-month gain in average hourly wages of 0.3% versus 0.4% in December, based on the median estimates of economists polled by The Wall Street Journal.
In other U.S. data released on Thursday, fourth-quarter productivity rose at a 2.7% pace compared with a year earlier, suggesting the economy might be able to grow faster than expected even as inflation slows. The final reading of the S&P manufacturing purchasing managers’ index for January came in at 50.7, slightly higher than previously estimated and the strongest improvement in manufacturing performance since September 2022. Meanwhile, the ISM factory index improved in January month but remained in contractionary territory.
Overseas, the Bank of England left interest rates unchanged at 5.25%, but hinted the next move might be a rate cut.
What analysts are saying
Wednesday’s hawkish Fed statement and press conference by Powell “pushed back on the market’s desire and expectation of a March rate cut. The committee will have two more months of inflation data before their next meeting, but unless we have a rapid deterioration of the economy and labor force, we don’t see them cutting in March,” said Mike Sanders, head of fixed income at Madison Investments in Wisconsin.
“We echo the caution Chairman Powell expressed about services inflation. With goods inflation already below 2% and negative in some areas, achieving the Fed’s 2% target will depend heavily on a drop in services inflation,” Sanders wrote in an email to MarketWatch.
