(Bloomberg) — Bond traders are betting that the Federal Reserve is far from done raising interest rates. Next week will help find out if they are right.
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The monthly consumer-price index report provides the latest insight into how far the central bank needs to go to bring inflation back to its target. Economists are predicting the biggest monthly jump in 14 months as the economy defies gloomy forecasts and energy prices rise – and the stock market fears it could come in even faster than expected.
The figures could provide a fresh boost to the Treasury market as investors expect a surprisingly strong growth rate to keep monetary policy on hold for longer than expected.
While signs of a cooler labor market fueled optimism that the Fed could be on the way, futures traders see a roughly 50% chance of a rate hike in November after the September 19-20 meeting. As yields soared to their highest level since before the 2008 financial crisis, Treasuries posted a third consecutive annual loss.
“Next week’s CPI data may provide a little more color,” said Leslie Falconio, head of taxable fixed income strategy at UBS Global Wealth Management. “We do not expect the federation to act in September. But we’re still saying they won’t be moving in November either – you really have to give it a 50/50 chance.
Inflation remained stubbornly above the Fed’s 2% target, despite falling from a four-decade high last year.
Consumer price index growth is expected to increase to 3.6% in August, ahead of a year earlier. By Bloomberg. But month-on-month headline CPI is forecast to rise 0.6%, the biggest jump since inflation peaked in June 2022.
Fed officials have repeatedly emphasized that they remain mindful of inflation concerns and will hold off on raising interest rates.
New York Fed President John Williams said on Thursday that monetary policy is “in a good place,” but officials need to analyze data to decide how to proceed.
The Fed raised its benchmark interest rate to 5.25% in July, the highest level in 22 years, after it was held in June. Policymakers have not ruled out another rate hike this year, and Fed Chairman Jerome Powell said their path will depend on upcoming economic data.
What Bloomberg Economics Says…
“We expect monthly headline CPI to accelerate to 0.6% (from 0.2% in July) on higher oil prices, versus 3.6% year-on-year (from 3.2%). The market may conclude that the Fed needs to hike further, but that would be the wrong take.” We think.
– Anna Wong, America’s chief economist
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That has put the bond market on edge as each key piece of data comes in and traders look to determine whether the Fed’s rate will peak. There should be no comments by the federation officials next week.
Given the strength of the economy and inflationary pressures, the market is trying to gauge how much the Fed will ease policy next year. Futures peg the central bank’s benchmark rate at around 4.4% through 2024, higher than the roughly 2.5% seen as neutral for economic growth.
The swelling bond market has struggled with a flood of new debt sales to cover the federal budget deficit, contributing to pressure on long-term yields. And investors are pulling back from long-dated bonds after the Fed shifts to easing monetary policy again, arguing that their yields will return above the short-term.
William Marshall, head of U.S. price strategy at BNP Paribas, said the Treasury market is “right now in the realm of high U.S. yields.” Still, any rally in Treasuries that favors the steeper yield curve in 2024 “will not see a significant reduction in long-dated yields,” he said.
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