(Bloomberg) — The US bond market is driving home a lesson about the new world investors are living in: The data matter far more than anything the Federal Reserve might say.
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That was on stark display Wednesday, when a softer-than-expected rise in the consumer price index that morning set off one of the biggest Treasury rallies of the year.
Less than six hours later, after the Fed’s latest economic projections penciled in just one rate cut this year, the rally faded a little. But it revived Thursday as an unexpected drop in producer prices and a rise in jobless claims suggested inflation pressures are continuing to ease. The 10-year yield ended Friday near 4.2%, down 21 basis points in the biggest weekly drop since mid-December.
In short, the dovish inflation data drowned out any hawkish sounds from the Fed.
The movements underscore the diminished significance of the Fed’s guidance at a time when the economy keeps surprising virtually everyone, including central bank policymakers themselves. Fed Chair Jerome Powell at last week’s post-meeting press conference acknowledged as much, saying that the Fed is mindful of going where the data leads.
That means the bond market is likely to continue on a rather bumpy path as the interest-rate outlook is reassessed whenever key data arrive.
Policymakers “are going to talk, but the market needs to discount more than usually what they say in this environment,” said Jean Boivin, head of the BlackRock Investment Institute. “This environment is one where there is excessive response to incoming macro data.”
Those data points recently have been more favorable to bond investors. The core consumer price index rose a less-than-projected 0.2% in May in a welcome shift from earlier this year, when higher-than-expected figures fanned worries about elevated inflation. Although payroll growth remains solid, other data, such as job openings, jobless-benefit claims and unemployment suggest the labor market is cooling.
These data boosted investors’ confidence that the Fed will start cutting rates later this year. Traders are pricing in that the Fed is highly likely to enact two quarter-point rate cuts this year, with the first move now seen as soon as September, derivative trading shows.
That’s slightly more aggressive than what Fed officials put down on their so-called dot-plot forecasts. Their median projection was for one cut this year, down from the three telegraphed at the March meeting. For 2025, though, officials now see four cuts, more than the three previously outlined.
But Powell signaled that investors should take those forecasts with a grain of salt, saying Fed officials are not “trying to send a strong signal” with them.
A data-dependent Fed doesn’t mean each economic figure will alter the policy trajectory, and as volatile as bond prices have been, the market’s expectations are far more in step with the Fed than they were late last year. Then traders were expecting steep series of cuts to start as soon as March.
What Strategists Say…
The economy appears to be robust enough that the Federal Reserve may not start cutting interest rates until after November’s US elections, which will keep the yield curve inverted until the rate reductions begin. Fed sentiment remains broadly neutral, even though the economy is running well above trend and inflation is lingering above the Fed’s 2% target.
—Ira Jersey and Will Hoffman. Read more here.
Fed officials have said several good inflation reports are needed before they will have enough confidence to start easing policy.
“They are truly not going to overreact to one or two data points,” said Gargi Chaudhuri, head of iShares investment strategy, Americas at BlackRock Inc.
Without reliable guidance from the Fed, data-watching, by definition, comes with more volatility. Treasuries staged a powerful rally late last year following a sharp decline in inflation, before sharply reversing course during the first four months of 2024. Then the market did another about face, one that has pulled the 10-year yield down nearly half a percentage point since late April.
The market is poised to take a breather this week, with no major data that would rival the jobs and inflation reports from the last two weeks. A slew of Fed officials, including Governors Lisa Cook and Adriana Kugler, are schedule to speak next week, as they often do after the policy-setting meetings.
“Markets right now are reacting, sort of overreacting, to a single set of discrete data points,” said Jerome Schneider, head of short-term portfolio management and funding at Pacific Investment Management Co. “These positive signals are just beginning to break at sunrise, though the longer-term situation still remains a little bit cloudy.”
What to Watch
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Economic data:
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June 17: Empire manufacturing
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June 18: NY Fed services business activity; retail sales; industrial production; capacity utilization; manufacturing (SIC) production; business inventory, TIC flows
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June 19: MBA mortgage applications; NAHB housing market index
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June 20: current account balance; initial jobless claims; housing/building permits; Philadelphia Fed business outlook
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June 21: S&P Global manufacturing, service PMI (preliminary); Leading index; existing home sales
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Fed calendar:
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June 17: Philadelphia Fed President Patrick Harker; Fed Governor Lisa Cook
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June 18: Richmond Fed President Thomas Barkin; Boston Fed President Susan Collins; Dallas Fed President Lorie Logan; Federal Reserve Governor Adriana Kugler; St. Louis Fed President Alberto Musalem; Chicago Fed President Austan Goolsbee
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June 20: Minneapolis Fed President Neel Kashkari; Richmond Fed’s Barkin
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Auction calendar:
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June 17: 13-, 26-week bills; 42-day cash management bills
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June 18: 20-year bond reopening
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June 20: 4-, 8-, 17-week bills; five-year TIPS reopening
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–With assistance from Cameron Crise.
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