Bond yields experienced an early rise on Tuesday as investors kept a close eye on U.S. retail sales data. Additionally, the easing of geopolitical tensions fueled a decrease in demand for haven assets.
Key Developments
- The yield on the 2-year Treasury (BX:TMUBMUSD02Y) increased by less than 1 basis point to reach 5.114%. It’s important to note that yields and prices move in opposite directions.
- The yield on the 10-year Treasury (BX:TMUBMUSD10Y) saw a rise of 4 basis points, reaching 4.752%.
- Similarly, the yield on the 30-year Treasury (BX:TMUBMUSD30Y) climbed by 5.1 basis points to 4.904%.
Market Drivers
The hope that U.S. President Joe Biden’s visit to the Middle East may contribute to preventing the Israel/Hamas conflict from escalating into a larger regional crisis has played a role in reducing demand for perceived safe investments like U.S. Treasuries.
Meanwhile, investors are eagerly waiting for updates on the state of the U.S. consumer, which will be revealed with the publication of the September retail sales report at 8:30 a.m. Eastern Time. Since household spending accounts for approximately 70% of the U.S. economy, the data will likely influence the Federal Reserve’s decision-making regarding monetary policy.
Key speeches from Federal Reserve officials are also scheduled throughout the day. John Williams, the president of the New York Fed, is set to speak at the Economic Club of NY at 8 a.m., followed by Richmond Fed President Tom Barkin offering his insights on the economic outlook at 10:45 a.m.
Notably, market expectations currently indicate a 90% probability that the Federal Reserve will maintain interest rates within a range of 5.25% to 5.50% after its upcoming meeting on November 1, as per the CME FedWatch tool.
The Outlook for the Federal Reserve’s Interest Rate Decision
According to 30-day Fed Funds futures, the chances of a 25 basis point rate hike in December are currently priced at 30%. However, it is unlikely that the central bank will lower its Fed funds rate target back to around 5% until August 2024.
Other Economic Updates
In addition to the interest rate decision, there are several other U.S. economic updates scheduled for release on Tuesday. These include:
- September Industrial Production and Capacity Utilization at 9:15 a.m.
- Homebuilder Confidence Index for October at 10 a.m.
- August Business Inventories at 10 a.m.
Analysts’ Insights
Analysts are closely watching the upcoming retail sales data to gauge whether U.S. consumers are starting to show signs of fatigue. The consensus forecast predicts a 0.3% increase in the headline figure. However, analysts are particularly interested in any potential decline in the control group data.
Stephen Innes, Managing Partner at SPI Asset Management, states, “The recent messaging from the Federal Reserve suggests that they may not implement the final rate hike projected by the dot plot. This flexibility to hold off on rate hikes is based on the belief that the significant repricing of long-term Treasury yields, notably the 100-basis point increase in the term premium, could serve as an alternative to an actual rate hike.”
