U.S. Treasury yields moved mostly higher on Thursday. This shift followed the release of economic data that came in stronger than analysts had anticipated. The numbers slightly dented market expectations that the Federal Reserve will cut interest rates soon.
Key Economic Reports Surprise to the Upside
The Labor Department reported that weekly initial jobless claims fell by 9,000. The seasonally adjusted figure reached 198,000. This result was notably below the Reuters poll forecast of 215,000 claims.
A separate report showed U.S. import prices increased by 0.4% over the two-month period from September to November. Additionally, regional manufacturing reports for January from the New York State and Mid-Atlantic Federal Reserve Banks also came in stronger than expected.
Market Expectations Adjust Lower
JoAnne Bianco, a partner and senior investment strategist at BondBloxx Investment Management in Chicago, commented on the data. "Nothing in terms of these releases has moved the needle in terms of a higher expectation for rate cuts," she said. "In fact, it seems to be stable to lower expectations."
Bianco elaborated further. "There's really virtually no chance of a cut at the January meeting. The first meeting where there's even like a 50% chance that they cut rates isn't until June, and even that probability has come down in recent weeks. So there are likely scenarios where the Fed wouldn't cut this year."
The yield on the benchmark U.S. 10-year Treasury note gained 1.6 basis points to 4.156%. According to the CME FedWatch Tool, expectations for a rate cut at the Fed's late January meeting now stand at just 5%.
Markets are currently pricing in a 21.6% chance for a cut of at least 25 basis points at the March meeting. This is down from 26.7% in the prior session and a roughly 50% chance just a month ago.
Federal Reserve Officials Weigh In
Chicago Federal Reserve President Austan Goolsbee said the U.S. central bank should remain focused on getting inflation down. He pointed to ample evidence of job market stability.
Kansas City Federal Reserve President Jeff Schmid reiterated his stance against cutting interest rates. He called inflation "too hot" and predicted that Trump administration policies would build economic momentum. He noted demand has been outpacing supply, putting upward pressure on prices.
Meanwhile, San Francisco Federal Reserve President Mary Daly preached caution. She said the central bank should be deliberate in calibrating policy. Daly noted economic data looks promising despite uncertainties and continued risks to both inflation and employment goals.
Yield Curve and Inflation Expectations
The two-year U.S. Treasury yield, which typically moves with Fed rate expectations, climbed 4.4 basis points to 3.558%. The yield on the 30-year bond slipped slightly, down 0.8 basis point to 4.787%.
A closely watched part of the U.S. Treasury yield curve, measuring the gap between two- and 10-year Treasury notes, was at a positive 59.6 basis points. This spread is seen as an indicator of economic expectations.
Inflation expectations also edged higher. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) hit a two-month high of 2.37%. The 10-year TIPS breakeven rate was last at 2.297%. This indicates the market sees inflation averaging about 2.3% annually over the next decade.
The stronger-than-expected data has clearly shifted the narrative in financial markets. Investors are now reassessing the timeline for potential Federal Reserve policy easing.
