- Treasury yields fell on Thursday as it became clearer that US inflation was on a steady downtrend.
- Interest futures eased at the start of the week due to a surge in risk appetite.
- Market participants are waiting to see US inflation expectations.
Interest futures extended gains on Friday as Treasury yields eased on increasing expectations for Fed rate cuts. However, prices had a difficult start to the week as risk appetite soared on a trade truce between China and the US. Most investors felt confident enough to buy equities at the expense of the bond market.
US 2-year Treasury yield (Bloomberg)
Treasury yields fell on Thursday as it became clearer that US inflation was on a steady downtrend. Data earlier in the week revealed that consumer inflation increased by 0.2% in April. Meanwhile, economists had expected a 0.3%. The annual figure was also softer at 2.3% compared to forecasts of 2.4%. The downbeat report increased expectations for a Fed rate cut in September. However, interest futures remained subdued as focus remained on US trade policies.
However, by Thursday, it became clearer that price pressures were rapidly declining. The US PPI dropped by 0.5%, surprising economists who forecasted a 0.2% increase. Meanwhile, although retail sales increased by 0.1%, it was a sharp drop from the last reading of 1.7%. Therefore, it pointed to weak consumer spending.
All these reports increased pressure on the Fed to lower borrowing costs. However, experts believe the full impact of Trump’s tariffs has not been reflected in data yet. Therefore, policymakers might remain cautious. At the same time, the outlook for rate cuts might keep changing.
Interest futures eased at the start of the week after China and the US agreed to temporarily pause their trade war. After weeks of waiting, investors got relief. The US agreed to cut tariffs on Chinese goods to 30%. Meanwhile, China cut tariffs on US goods to 10%. The move boosted confidence in US assets. At the same time, risk appetite improved, and investors dumped safe-haven assets like bonds. Instead, they bought equities.
Furthermore, geopolitical tensions eased with a ceasefire deal between India and Pakistan. At the same time, reports revealed that Russia and Ukraine could soon meet, increasing the chances of a ceasefire deal.
Market participants are now waiting to see US inflation expectations and consumer sentiment figures. High inflation expectations could contribute to higher prices. Therefore, it will shape the outlook for Fed rate cuts.
