Powell's Rate-cut Pushback and Jobs Data Loom Over Treasury Yields

Thursday morning witnessed a broad decline in Treasury yields, a shift attributed to U.S. data revealing potential softening in the labor market and growing concerns among traders regarding a Federal Reserve policy misstep. The dynamics in the Treasury market were reflected in the movement of yields across different maturities.

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The 2-year Treasury yield exhibited a marginal decrease of less than 1 basis point, slipping from 4.227% to 4.221% on Wednesday. In contrast, the 10-year Treasury yield experienced a more significant decline, dropping by 6.7 basis points to 3.898% from Wednesday's 3.965%. This rate was on track to reach its lowest level in at least a month. Additionally, the 30-year Treasury yield saw a notable decrease of 8.5 basis points, falling from 4.216% to 4.131% compared to Wednesday.

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The driving factors behind these market movements include recent data releases and evolving sentiments among traders. Initial jobless claims, disclosed on Thursday, showed a nearly three-week high of 224,000 at the end of January, suggesting a potential softening in the previously robust labor market.

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Furthermore, there has been a recalibration in expectations regarding the timing of the Federal Reserve's first interest rate cut in 2024. Traders now indicate a 95.9% probability of at least a quarter-point reduction by May. While the central bank has kept its benchmark interest-rate target steady between 5.25% and 5.5%, Federal Reserve Chair Jerome Powell, during a press conference, seemed to eliminate the possibility of a rate cut in March.

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Despite the Fed's stance, market analysts suggest that concerns about the banking system may have overshadowed the central bank's decisions. Treasury yields reached their lowest levels in at least two weeks on Wednesday, driven by apprehensions about regional banks. New York Community Bancorp witnessed a significant decline in its shares after highlighting challenges in commercial real estate.

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As the week progressed, the bond market displayed reduced volatility, settling into the fourth percentile for four-week volatility on the 10-year yield compared to the past three years. Bill Merz, the head of capital market research for U.S. Bank Wealth Management, sees this as an indication that investor expectations regarding Fed policy and inflation have stabilized in the early stages of 2024.

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Looking ahead, the market awaits the January nonfarm payrolls report on Friday, projecting 185,000 new jobs and a month-on-month increase in average hourly wages of 0.3%. Additionally, recent U.S. data, such as fourth-quarter productivity and manufacturing indices, provides insights into the economy's resilience and potential for growth, even amid a slowing inflationary pace.

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In the global context, the Bank of England decided to maintain interest rates at 5.25%, signaling the possibility of a future rate cut. Analysts, including Mike Sanders, head of fixed income at Madison Investments in Wisconsin, emphasize the caution expressed by Chairman Powell about services inflation. Sanders points out that achieving the Fed's 2% inflation target will depend heavily on a decline in services inflation, considering the current status of goods inflation.

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