What bond investors are watching this week: ‘Stuck in limbo’ ahead of the Fed
Bond yields have been trading in a fairly stable range since late March, and it looks like only the Federal Reserve can break this trend.
Oddly enough, it was Friday’s jobs report in May – not April’s disappointment – that caused the biggest daily drop in the 10-year bond yield since March, according to Bloomberg data. This could be because the numbers were strong, but probably not strong enough to offset weak data from last month and push back the Fed’s timetable to reduce the pace of its bond purchases.
But even Friday’s move left yields in the same range they traded for much of the second quarter. The first quarter, on the other hand, was the worst for Treasuries in over 40 years. That’s because economists’ forecasts haven’t changed much since the end of March, according to strategists at
; While employment and inflation data have been volatile this quarter, this was widely expected amid a bumpy economic reopening. For example, instead of predicting a weaker-than-expected employment recovery after April’s weak report, economists instead predicted the same strength of recovery over a longer period, Barclays found. This means that the Fed may not change its plans much either.
“As the talk about tapering has picked up, markets likely consider that the baseline for actual tapering hasn’t changed much,” the bank’s strategists wrote in a note on Friday. “With no real momentum in data or policy actions, markets are stuck in limbo, awaiting direction. “
In other words, investors should not hold their breath this week while waiting for yields to deviate sharply from their recent range of 1.54% to 1.7%, at least not for fundamental reasons. Traders and investors can change their positioning ahead of the central bank meeting on June 15-16, but these market moves could be quickly reversed depending on the tone of the Fed.
Despite this, Barclays argues that long-term Treasuries may not reflect the risk of rising inflation and the possibility that central bank officials will react more aggressively than expected.
“While inflation is likely to be lower in the coming months than the April report, we believe that even excluding outliers, the underlying data over the next few months should be slightly higher than the April report. comfort levels for many Fed participants, ”the strategists wrote.
So a few events this week, especially Thursday, might matter after all: the latest consumer price report and a 30-year bond auction. Economists are forecasting a 0.4% increase in consumer prices in May from the previous month, after April brought the fastest monthly increase since 1982 in a basic measure of inflation. And demand for the 30-year bond auction could be important to see if investors pull out of longer-dated debt, which was rocked in the first quarter by concerns about growth, duration and politics. from the Fed.
You can find more details on these reports and much more below:
Small business sentiment: The National Federation of Independent Businesses Small Business Optimism Index is expected to hit 100.9 in May from 99.8 the previous month, which would be a fourth consecutive increase. The data should be released at 6 a.m.
Trade balance: The US trade deficit is expected to narrow to $ 68.5 billion in April, from $ 74.4 billion the previous month. Data is scheduled for 8:30 a.m.
Job vacancies and workforce turnover survey: April job posting data should help investors take a closer look at this month’s lackluster jobs report and employers’ struggles to hire new workers. Few economists provide forecasts for this figure, but the Data for March showed 8.1 million openings, the highest since the Bureau of Labor Statistics began measuring in 2000. The report is due at 10 a.m.
Treasury auction: The United States is expected to sell $ 58 billion in 3-year notes at 1 p.m. Demand for these securities is expected to hold relatively well as markets fail to integrate a faster pace of Fed rate hikes after last week’s jobs report.
Mortgage loan applications: The Mortgage Bankers’ Association’s index of mortgage applications for the week ended June 4, a measure of demand in the housing market, is due at 7 a.m. The index fell 4% for the week ended May 28.
Wholesale stocks: The Census Bureau is expected to report that its final reading of wholesale inventories rose 0.8% in April from the previous month, in line with its preliminary reading. Data is scheduled for 8:30 a.m.
Treasury auction: US plans to sell $ 38 billion in 10-year notes at 1 p.m.
Inflation data: See above. The Bureau of Labor Statistics is expected to report that the Consumer Price Index, which is not the Fed’s preferred inflation indicator, rose 4.7% in May from a year earlier. Excluding food and energy, it is expected to increase by 3.4% compared to last year. Investors should keep in mind that the annual figures are distorted by their comparison with the pandemic. Data is scheduled for 8:30 a.m.
Unemployment benefit claims: Economists forecast that initial jobless claims fell to 370,000 in the week ended June 5, from 385,000 the week before. It would be another pandemic low. The exit is scheduled for 8:30 a.m.
Treasury auction: The United States is expected to sell $ 24 billion worth of 30-year bonds at 1 p.m. It will be an interesting test of the demand for long-term debt ahead of the Fed’s June 15-16 meeting. If investors are worried about the volatility of returns around the meeting, they may be less keen on raising the price (and lowering returns) of long-term securities. If they think the Fed will take an easier approach than what is valued in the markets, they may be keen to buy.
Consumer sentiment: Economists forecast that the University of Michigan’s preliminary reading of the June Consumer Confidence Index will improve to 84.2 from its May reading of 82.9. They also predict that one-year inflation expectations will also rise from 4.6% to 4.7%. Long-term consumer inflation expectations were around 3% last month, according to the survey, the highest since 2013.
Write to Alexandra Scaggs at [email protected]