Treasury yields rise ahead of crucial inflation data

Economists forecast the annual headline PCE growth to slow from 2.6% in December to 2.4% last month. The annual core reading — which strips out some volatile items like food and energy — is expected to be steady at 2.8%.

However, the month-on-month headline rate is forecast to pick up from 0.2% to 0.3% and the core to rise from 0.2% in December to 0.4% in January.

The PCE report is considered the Federal Reserve’s favored inflation gauge, and so if it shows the month-on-month rise as expected then it should cement expectations that the central bank may not start cutting borrowing costs until the summer.

Markets currently are pricing in a 97.5% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on March 20th, according to the CME FedWatch tool.

The chances of at least a 25 basis point rate cut by the subsequent meeting in May is priced at 20%, down from 88.3% just a month ago. The chances of at least a 25 basis point rate cut in June are 61.7%.

Thursday also brings additional U.S. economic data and a batch of Fed officials making comments.

The weekly initial jobless claims report will be released at 8:30 a.m., followed at 9:45 a.m. by the February Chicago Business Barometer and January pending home sales at 10 a.m.

Fed Gov. Christopher Waller is due to speak at 10:15 a.m., Atlanta Fed President Raphael Bostic at 10:50 a.m., Chicago Fed President Austan Goolsbee at 11 a.m., and Cleveland Fed President Loretta Mester at 1:15 p.m. and again at 3:30 p.m.

Meanwhile, over in Japan, the 10-year government bond yield
BX:TMBMKJP-10Y
rose 1.6 basis points to 0.713% after Bank of Japan board member Hajime Takata signaled the time for exiting its negative interest rate policy was getting closer.

What are analysts saying

“Unexpectedly warmer CPI and PPI monthly inflation for January (published earlier in the month) supported Fed policymakers emphasizing the FOMC is in no rush to start cutting rates. In the last three weeks, futures market has significantly dialed down expectations for any cut in March,” said Satyam Panday, chief U.S. economist, S&P Global Ratings.

“To be sure, monetary policymakers have expressed wanting to see more data to have more confidence that inflation is indeed on a 2% track sustainably. We are of the view that January is a bump on the road, with disinflation enduring enough through the first half of 2024, which will get core PCE rate under 2.5% before mid-year,” he added.