(Bloomberg) — Nothing has been setting the US bond market’s direction this year more than the monthly inflation figures. This week will be no exception.
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The release of the April consumer-price index on Wednesday is poised to provide the biggest test yet of the rally that started this month when Federal Reserve Chair Jerome Powell swatted away worries that the central bank may raise interest rates again. It gained steam after the Labor Department reported a slowdown in job growth, pulling yields down sharply from last month’s peaks.
The advance has increased the stakes in the upcoming inflation data — which could either extend it or doom it as another ill-fated turnaround. Bank of America Corp. strategists said the market will be in a “holding pattern” until then.
This year’s previous CPI reports fueled bond-market selloffs as faster-than-expected readings fanned worries that the Fed’s gains against inflation have stalled.
The last one, on April 10, sent 10-year Treasury yields surging 18 basis points, the biggest one-day move caused by the CPI data since 2002. All told, half of the more than 60-basis-point jump in that benchmark rate this year occurred on days when the CPI was released.
“The reality of the market right now is where we lurch from data release to data release,” said Jonathan Cohn, head of US rates desk strategy at Nomura Securities International. “There does seem to be some kind of economic softening here — but effectively what it will take for this rally to sustain is the sign off from the CPI data that things aren’t re-accelerating, that we are seeing disinflation come through.”
Until this month, the data had largely been underscoring the US economy’s strength, driving traders to unwind once widespread bets that the Fed would cut interest rates several times this year. That reset had saddled investors with fresh losses and sapped conviction about where the market is headed.
Futures positions signal that many investors covered short bets on Treasuries as yields crested last month. And overall, such positioning has been volatile as investors navigate the market’s uncertainty, Bloomberg Intelligence’s chief US interest-rate strategist, Ira Jersey, said in a report.
“It’s a bit to do with people having put on risk before and gotten burned, with risk takers now being a bit gun shy,” said Cohn.
This month, though, bond prices have risen steadily on fresh signals that the economy and labor market are cooling and will allow the Fed to start easing monetary policy late this year.
Ten-year Treasury yields have declined during all but two trading sessions in May, sliding nearly 20 basis points to around 4.5%. More broadly, US Treasuries gained about 1.3% through May 9, clawing back some of the 2.3% loss in April — the worst in more than a year, according to Bloomberg’s index.
The CPI is expected to show slowing in inflation. The core rate — which is seen as the best gauge of underlying pressures, because it excludes volatile food and energy costs — is expected to have risen by 0.3% in April from a month earlier, down from 0.4% in March, according to forecasters surveyed by Bloomberg. The overall index is seen rising by 3.4% from a year earlier, compared with the 3.5% increase in March.
That’s still well above the 2% rate that’s targeted by the Fed. Several US central bank officials have recently emphasized that policy rates may need to remain high for longer, with Governor Michelle Bowman saying that the recent pace of inflation indicates it may not be appropriate for policymakers to cut interest rates in 2024.
In light of the market’s recent rebound, however, traders may see any signs of progress against inflation as a cue to buy. Matthew Luzzetti, chief US economist at Deutsche Bank AG, doesn’t expect a first Fed cut until December. But, he said “investors’ sentiment is certainly more prone to react in the dovish direction, given the momentum.”
What to Watch
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Economic data:
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May 13: New York Fed 1-year inflation expectations
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May 14: NFIB small business optimism; producer prices; revisions factory and durable goods orders
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May 15: MBA mortgage applications; Empire manufacturing; consumer price index; real average earnings; retail sales; NAHB housing market index; Treasury TIC data
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May 16: initial jobless claims; housing/building permits; NY Fed services business activity; import and export price index; industrial production; capacity utilization; manufacturing (SIC) production
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May 17: Leading index
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Fed calendar:
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May 13: Cleveland Fed President Loretta Mester; Fed Vice Chair Philip Jefferson
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May 14: Fed Governor Lisa Cook; Federal Reserve Chair Jerome Powell and ECB Governing Council member Klaas Knot speak at special event
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May 15: Minneapolis Fed President Neel Kashkari; Fed Governor Michelle Bowman
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May 16: Vice Chair for Supervision Michael Barr; Philadelphia Fed President Patrick Harker; Mester; Atlanta Fed President Raphael Bostic
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May 17: Fed Governor Christopher Waller
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Auction calendar:
–With assistance from Edward Bolingbroke.
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