(Bloomberg) -- Bond traders who are starting to wager on further declines in the US Treasury market are turning to a key inflation report for clues on the pace ahead for Federal Reserve interest-rate cuts.
Strong job-creation data spurred a selloff in the bond market late last week, pushing yields higher as investors ditched bets that policymakers will deliver another half-point rate reduction this year. With concern over US employment subsiding, investors are now looking to Thursday’s inflation reading for signs the Fed has price pressures are under control.
While Kim Rupert, an economist at Action Economics, expects a “tame” reading, “that’s not to say we can’t be surprised. And clearly, an upside surprise can add to the bearish reaction following the payroll report.”
A consensus of forecasts compiled by Bloomberg predicts that excluding the food and energy components consumer prices rose an annualized 3.2% last month.
That’s still above the Fed’s 2% target. Citadel Securities’ Michael de Pass said on Bloomberg Television he expects only one more quarter-point cut this year from the Fed given persistent inflation and US economic resilience.
“We end up in a world where inflation remains sticky, above target, and the pace of easing slows down relative to what the market has priced in,” de Pass said.
Since last Friday’s labor-market report, traders in the futures market linked to the Secured Overnight Financing Rate have been unwinding their long positions. At the same time, some short positions have emerged as market expectations fade for aggressive Fed cuts.
Pricing in the swaps market implies traders are less than certain the Fed will lower rates in November. Traders also no longer see another half-point reduction coming in the remainder of 2024.
In the options market, new positions have been skewed toward hedging a scenario where the central bank eases just 25 basis points at the November meeting before holding the policy rate in December.
Minutes from the central bank’s September gathering, released on Wednesday, showed Fed Chair Jerome Powell received some pushback on a half-point interest-rate cut, with some officials preferring a quarter-point reduction.
US Treasuries have slid 1.3% so far in October, set to snap a five-month gaining streak, according to a Bloomberg gauge. Also on Thursday, the market will have to digest a third round of Treasury coupon-bearing debt sales, with an auction of 30-year bonds. That follows a $39 billion sale of 10-year debt on Wednesday and $58 billion of three-year notes a day earlier.
--With assistance from Edward Bolingbroke.
(Updates with context throughout.)
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