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Bond Report: Treasury yields firmer after retail data points to stoic consumers

Benchmark bond yields rose on Thursday ahead of weekly jobs claims data.

What’s happening

The yield on the 2-year Treasury

slipped by 2 basis points to 4.366%. Yields move in the opposite direction to prices.

The yield on the 10-year Treasury

rose 4.3 basis points to 3.735%.

The yield on the 30-year Treasury

added 2.6 basis points to 3.869%.

What’s driving markets

Treasury yields were mostly firmer on Thursday, but holding near six-week lows, as traders waited for fresh catalysts and continued to assess the prospects for future Federal Reserve interest rate rises in the wake of recent data suggesting inflationary pressures have now passed their peak.

Stronger-than-forecast retail sales figures on Wednesday suggested the consumer was holding up well despite the Fed’s attempts to damp demand.

Markets are pricing in a 85% probability that the Fed will raise borrowing costs by another 50 basis points to a range of 4.25% to 4.50% after its meeting on December 14th, according to the CME FedWatch tool. The central bank is expected to take its Fed funds rate target to 4.9% by May 2023, according to 30-day Fed Funds futures.

However, Goldman Sachs economists think the market is too sanguine about further Fed tightening and have increased its forecast for peak U.S. interest rates to 5.25% at the top of the range, up from the previous call of 5%.

U.S. economic updates set for release on Thursday include the weekly initial jobless claims, alongside October building permits, housing starts numbers and the Philadelphia Fed manufacturing index, all due at 8:30 a.m. Eastern.

And it’s yet another day chock full of Fed chatter – though not all may touch on monetary policy. Atlanta Fed President Raphael Bostic is down to speak at 7:30 a.m.; St. Louis Fed President James Bullard talks at 8 a.m.; Fed Governor Michelle Bowman speaks about financial literacy at 9:15 a.m.; and Fed Governor Phillip Jefferson makes remarks about inclusive growth at 10:40 a.m.

U.K. 10-year gilt yields

were little changed at 3.150% ahead of the government’s autumn budget statement, due to begin at 6:30 a.m. Eastern.

What are analysts saying

“In the wake of the economy’s deceleration from 6% growth last year, inflation will continue to decelerate in fits and starts (look for some upside acceleration in the Nov data), but a return to 2% is not in the cards,” said Steven Blitz, chief U.S. economist at TS Lombard.

“There is no impending recession evident in the data, the economy remains well above potential, and against all this, the real funds rate is still too low. I expect a 75BP increase at the December meeting, and a 50BP hike in February”.

“At some point spending sags, unemployment rises, and hikes turn to cuts. The time is nearing – but not if the FOMC slows in Dec and allows financial conditions to ease further,” Blitz concluded.

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