(Bloomberg) -- US Treasuries steadied ahead of a key US inflation reading that will set the direction for markets after a choppy weak of trading.
Two-year yields, among the most sensitive to changes in the outlook for interest rates, were little changed at 4.44% after falling to a five-month low of 4.34% on Thursday. Longer-dated yields drifted, with 10-year yields holding at 4.24%.
Core PCE data — the Federal Reserve’s preferred price gauge — will be the last major US economic data point before the central bank meets on Wednesday, and could prove pivotal in policymakers’ decision to begin easing policy or not.
The gauge is expected to post an annual 2.5% increase in June, a slightly slower pace than the month prior, according to a Bloomberg survey of economists.
“If Friday’s PCE data shows that the Fed is nearing its 2% inflation target, the bond market could react positively, potentially pushing 10-year yields below 4.18%,” said Althea Spinozzi, head of fixed income strategy at Saxo Bank. “Conversely, if the data does not support this, yields may continue to rise.”
Markets have been whiplashed in recent days by signs of a resilient US economy and calls for the Fed to begin interest-rate cuts. Data out Thursday showed GDP growth accelerated in the second quarter, while Former New York Fed President William Dudley said Wednesday that officials should ease policy next week.
Traders continue to price zero likelihood that the US central bank will start cutting rates on Wednesday, with a quarter-point reduction in September fully priced.
“As long as the PCE numbers behave today, and that even covers coming in a little big above consensus, I think the Fed will still cut in September,” said Stuart Cole, head macro economist at Equiti Capital UK. “The immediate outlook for yields is that they will hold onto the gains they have made since yesterday.”
--With assistance from Naomi Tajitsu.
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