Treasury yields showed minimal changes to slightly higher levels on Tuesday morning, lacking significant catalysts to drive the market amid a day devoid of major data releases.
Market Dynamics:Yields across the one-month to 30-year spectrum stabilized as traders awaited fresh information that could challenge the current consensus on the economy's trajectory and Federal Reserve policy. A notable event on the horizon is the Treasury's auction of $60 billion of 2-year notes scheduled for 1 p.m. Eastern time.
Looking Ahead:The market's focus is on Thursday's preliminary reading of fourth-quarter U.S. GDP growth, expected to come in at an annual pace of 2%, down from the third quarter's 4.9% rate. Friday will see the release of the Fed's preferred inflation gauge, the PCE, for December.
Market Sentiment:According to the CME FedWatch Tool, there is a 97.4% probability that the Fed will maintain interest rates within the range of 5.25%-5.50% next Wednesday. The likelihood of a 25-basis-point rate cut by March has decreased to 42.4%, down from 75.6% a month ago. The central bank is largely expected to bring its fed-funds rate target back down to 4%-4.25% or lower by December.
Global Developments:The Bank of Japan opted to keep its policy unchanged on Tuesday, maintaining a short-term rate of minus 0.1% and upholding its yield-curve control parameters. Additionally, Chinese officials are reportedly contemplating measures to stabilize the country's stock market.
Investor Perspectives:Brent Schutte, Chief Investment Officer of Northwestern Mutual Wealth Management Co., noted a recent surge in market expectations of inflation. He highlighted the rise in the five-year, five-year forward inflation breakeven rate, a measure closely monitored by the Fed, from a low of 2.13% in late December to 2.42% as of last Friday. Schutte expressed concerns about this trend potentially impacting the Federal Reserve's stance and increasing the likelihood of a recession in 2024.
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