Bond yields saw a slight increase on Thursday as traders continued to analyze the minutes from the Federal Reserve's most recent meeting and awaited further updates on the U.S. jobs market.
- The yield on the 2-year Treasury (BX:TMUBMUSD02Y) remained relatively stable at 4.341%. Remember, yields move in the opposite direction to prices.
- The yield on the 10-year Treasury (BX:TMUBMUSD10Y) rose by 3.3 basis points to 3.953%.
- The yield on the 30-year Treasury (BX:TMUBMUSD30Y) increased by 4 basis points to 4.114%.
The minutes of the Federal Reserve's December policy meeting, which were released on Wednesday, were seen by commentators as less dovish than expected. Officials gave little indication that the central bank is considering reducing interest rates at the rate anticipated by the market.
However, benchmark 10-year bond yields have remained below 4%, as traders also noted that recent job openings and manufacturing surveys indicated a slowing economy. This could potentially help the Fed achieve its 2% inflation target.
Investors will be looking to the December nonfarm payrolls report, scheduled for release on Friday, for further insights into a cooling labor market that may suppress wage inflation.
Find out more: Read about the holiday hiring boom or bust in the upcoming December jobs report.
On Thursday, there are several U.S. economic updates expected to be released, including the ADP private sector employment report for December at 8:30 a.m. Eastern, weekly initial jobless benefit claims at 8:30 a.m., and the S&P final services PMI for December at 9:45 a.m.
Fed Outlook: Interest Rates and Future Cuts
Market expectations indicate a high certainty of the Federal Reserve maintaining its benchmark interest rates at 5.25% to 5.50% during its upcoming meeting on January 31st. This prediction is currently estimated at a 93.3% probability, as suggested by the CME FedWatch tool.
Looking ahead to the subsequent meeting in March, there is a 70.2% probability of a rate cut of at least 25 basis points. According to the 30-day Fed Funds futures, it is projected that the central bank will gradually decrease its Fed funds rate target to approximately 3.95% by December 2024.
Insights from Analysts
A team of economists at Morgan Stanley, led by Chief U.S. Economist Ellen Zentner, weighed in on recent market trends and developments: “Since the last FOMC minutes, we’ve witnessed improvements in the labor market's equilibrium, unexpected declines in inflation rates, and a more relaxed financial landscape. Market interpretation of the FOMC's recent comments, coupled with softer fourth quarter data in 2023, has led to expectations for earlier and more aggressive rate cuts compared to what we initially anticipated and what the Fed communicated through their Summary of Economic Projections in December."
Moreover, Morgan Stanley stated, "The FOMC minutes from December underscored their stance against immediate interest rate cuts. Although growth and inflation risks have somewhat balanced out, the Federal Reserve remains highly cautious regarding inflationary threats. Consequently, it is probable that rates will remain unchanged for a longer duration than initially expected. We maintain our forecast of the first rate cut occurring in June."