December 9, 2023

The policy-sensitive 2-year Treasury yield rose above 4.2% on Thursday, hitting a one-week high with their 10- and 30-year counterparts, as Federal Reserve officials reiterate the need for higher interest rates. to continue.

What happened
what drives the markets

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Bond yields advanced after Federal Reserve officials insisted that higher borrowing costs are needed to halt inflation nearing a 40-year high.

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Neil Kashkari, the head of the Fed’s regional bank in Minneapolis, said Thursday that it is too early for the central bank to think about halting interest rate hikes because inflation shows little sign of peaking.

His remarks came a day after his colleague, San Francisco Fed Chair Mary Daly, was asked about futures market pricing in interest rate cuts next year, and she said, “I don’t see that at all.” Similarly, Atlanta Fed President Rafael Boustik said the Fed should achieve its benchmark rate target of between 4% and 4.5% by the end of this year, “and then hold on to that level and see how the economy and prices react.” does.”

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Recent US economic data – such as Wednesday’s ADP employment report and the ISM Services Index – have been stronger than expected, leaving enough room for policymakers to deliver more aggressive rate hikes. Meanwhile, hopes of a Fed pivot are dashing and turning into a sense of fear within financial markets.

Markets are pricing in a 77% chance that the Fed will raise interest rates to a range of 3.75% to 4% on November 25. The central bank is also expected to mostly pick up its fed-funds rate target. Between 4.5% and 4.75% or more as of March, according to the CME FedWatch tool.

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The next several days bring important data that investors hope could further influence the Fed’s thinking. The non-farm payroll report for September is due on Friday, while producer and consumer price data will be published next Wednesday and Thursday.

US data released on Thursday showed jobless claims hit a five-week high of 219,000. The number of people applying for unemployment benefits rose by 29,000 last week in a possible sign of rising US layoffs. Economists polled by The Wall Street Journal expected a total of 203,000 new claims for the seven days ended October 1.

what analysts are saying

“The stubbornly increased cost has put policymakers on a firm policy path to higher rates,” said Lindsay Piegza and Lauren Henderson of Stifel Nichols & Co.

September’s 75-basis-point hike by the Fed was the third consecutive move of that size, bringing the total amount of rate hikes so far to 300 basis points, and “Fed officials have clarified that there is no need to restore price stability.” still needs to be more stringent,” he wrote in a note.