The yield of US treasury bond bonds fell in volatile trading on Thursday, with the yield of short-term bonds leading the decline. The overall US December CPI data released on the same day was higher than expected. However, surprisingly, this did not significantly suppress the Federal Reserve's expectations of interest rate cuts. The market's expectations for the Fed's interest rate cuts in March and throughout the year even rose overnight.
Market data shows that the 10-year US Treasury yield hit a daily high after the release of the Consumer Price Index (CPI) data, but quickly fell all the way thereafter, hovering around the 4% mark throughout the day. As of the end of trading in New York, the 10-year US Treasury yield fell 6.3 basis points to 3.97%.
The yields of other US Treasury bonds with different maturities have also fallen across the board, with a particularly significant decline in short-term bond yields. Among them, the 2-year US Treasury yield fell 11.6 basis points to 4.253%, the 3-year US Treasury yield fell 10.8 basis points to 4.007%, the 5-year US Treasury yield fell 9.3 basis points to 3.886%, and the 30-year US Treasury yield fell 3.3 basis points to 4.174%.
Sinead Colton Grant, chief investment officer of wealth management of Bank of New York Mellon, said, "It is increasingly widely recognized that interest rates are falling this year. Although there will still be volatility, it is attractive to hold US treasury bond bonds with a yield of 4%."
The data released by the US Department of Labor on Thursday showed that the rebound in US inflation in December unexpectedly exceeded market expectations, with consumers paying higher prices for housing and cars. The data shows that the CPI increased by 3.4% year-on-year in December, marking the largest increase in three months. The month on month increase in CPI also exceeded expectations and reached 0.3%.
Excluding food and energy, the core CPI in December increased by 3.9% year-on-year, although it has fallen back to the "era 3", it still exceeds market expectations. Economists believe that core indicators can better reflect inflation trends than overall CPI.
This comprehensive and unexpected inflation report should have suppressed the expectation of the Federal Reserve's interest rate cut, but in fact, the financial markets are indeed moving towards this direction in the first time after the release of CPI data - US bond yields and the US dollar are rising in the short term, while gold prices are being suppressed. But this scene did not last long thereafter.
From the perspective of pricing in the interest rate market, the Federal Reserve observation tool of ChiNext shows that traders' bet on the probability of the Federal Reserve cutting interest rates in March ultimately rose to 75% overnight, at least 7 percentage points higher than the previous day.
In terms of interest rate pricing for the whole year, the market once again expects the Federal Reserve to cut interest rates by 150 basis points within the year - equivalent to about 6 25 basis point rate cuts.
How do industry institutions view it?
Many Wall Street institutions have also expressed their opinions on the unexpected rise in overnight US CPI data and the abnormal pricing of interest rate market bets.
Alexandra Wilson Elizondo, investment officer at Goldman Sachs Asset Management, said, "There is nothing in the inflation report that would prompt the Federal Reserve to cut interest rates faster. However, since inflation data is not overheating, hopes of an economic soft landing should not be affected. We will focus on the labor market to determine the speed and extent of the rate cut cycle. We still believe that starting rate cuts in the middle of this year would be more appropriate."
Richard Flynn, Managing Director of Credit Suisse Wealth Management, said, "The recently announced increase in inflation may not be welcomed by the market, but it is not surprising. If today's report is the beginning of a resurgence in inflation, then the Federal Reserve is likely to lower interest rates later than expected. The market seems to have already predicted ahead of schedule that the Federal Reserve will cut interest rates as many as six times in 2024."
Phillip Neuhart, Head of Market and Economic Research at First Citizen Bank Wealth Management, said, "Inflation data tells us that it will take time to bring inflation down to the Fed's target level. As core inflation rates are still close to twice the Fed's target, we still doubt whether the FOMC will cut interest rates at its March meeting."
For Michael Shaoul from Marketfield Asset Management, the latest inflation data, apart from still indicating that CPI will remain "sticky" above the 3% level, is not really unsettling. Of course, he also pointed out that this does not mean that a wave of rapid interest rate cuts is about to hit.
Seema Shah, an analyst at Xinan Asset Management, said, "Today's report highlights a fact that market participants are a bit too optimistic about the timing of the Federal Reserve's interest rate cut." She said that today's numbers are not bad, but they do indicate that inflation is still progressing slowly and is unlikely to plummet to 2%. Of course, as long as housing inflation remains high, the Federal Reserve will continue to resist the idea of imminent interest rate cuts.
Neuberger Berman's head of US interest rates, Olumide Owolabi, believes that "we may have passed the peak of market sensitivity to inflation data, as we see today. The key now is timing. As investors debate the timing of the Fed's rate cut, we expect US bond yields to fall into a narrow range."
Chris Zaccarelli, Chief Investment Officer of the Independent Advisory Alliance, said, "The most important thing for investors is that the Federal Reserve has completed its rate hike cycle (this report has not changed this). Therefore, whether they cut interest rates in March or June, or four, three, or only two cuts throughout the year, should not be too important."
David Russell from TradeStation stated that the inflation data has disappointed US stock bulls, but it may not have a significant impact as attention will soon shift towards financial performance.
It is worth mentioning that from the speeches of Federal Reserve officials who spoke overnight, the overall voices of hawks and doves are still intertwined. Cleveland Fed Chairman Mester said in an interview that the Fed needs to see more evidence before cutting rates, and pointed out that March's rate cut is too early. Chicago Fed Chairman Goolsby pointed out that sustained high housing inflation in CPI may have a relatively small impact on the Fed's personal consumption expenditure inflation target. 2023 is a good year for reducing inflation, and inflation will be the main factor determining when and how much to lower interest rates.