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Market at Crossroads: Crucial CPI Data to Guide US Bond Rally's Fate

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Leo Gonzalez

May 12, 2024 - 19:37 pm

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Navigating Uncertainty: US Bond Market Awaits Crucial Inflation Data

CPI Release Poised to Determine Continuation or Collapse of Recent Rally

This week, the eyes of the financial world turn once again to the United States bond market as it braces for the latest installment of inflation data. The April consumer-price index (CPI) is expected to notably influence market directions after recent events have set a tentative tone of optimism among investors. The market rally that initiated earlier this month could face a defining moment come Wednesday's CPI release.

Federal Reserve Chair Jerome Powell appeared to assuage some market fears by dispelling the notion of a potential hike in interest rates. The rally found further support following a report from the Labor Department which pointed towards a deceleration in employment growth. This caused a noticeable decline in yields from the peaks witnessed in the preceding month. Investors are now in a suspenseful wait mode, a dynamic described as a "holding pattern" by strategists at Bank of America Corp.

The CPI Factor: A Persistent Market Mover

The trajectory of the bond market in 2023 has been heavily influenced by CPI reports, which have not shied away from stirring up market selloffs. Market apprehension has been amplified by inflation readings that have frequently outpaced projections, suggesting that the Federal Reserve’s battle against inflation is far from over.

One cannot overlook the notable surge in 10-year Treasury yields that occurred on April 10, which was attributed to a CPI data release. This instance marked the largest one-day yield jump induced by inflation figures since 2002. Such volatility points to the high stakes involved in upcoming inflation figures, with approximately half of the significant increase in the benchmark rate this year occurring on CPI release days.

Jonathan Cohn, the head of US rates desk strategy at Nomura Securities International, has highlighted a prevailing state within the markets where investors seem to be positioned in a reactionary stance, awaiting pivotal data releases. The current economic climate hints at a softer stance, but the sustainability of this bond rally appears hinged upon the forthcoming CPI data confirming a trend of disinflation, as opposed to a re-acceleration of inflation rates.

Previous inflation data had primarily underscored the robustness of the US economy. This had the effect of unraveling formerly common expectations among traders that the Fed would opt for multiple interest rate reductions this year. Such resetting of anticipations inflicted fresh losses upon investors and created ambiguity regarding the future market direction.

Shift in Futures Positions and Volatility Among Investors

Bloomberg Intelligence’s chief US interest-rate strategist, Ira Jersey, acknowledges the zigzag pattern in investor's stances based on his report. The trend suggests investors, who had previously been aggressive by holding short bets on Treasuries, repositioned as yields reached their zenith last month. Amidst the uncertain climate that prevails, fluctuation in futures positions is an evident sign of investors navigating through the market's unpredictability.

Cohn further comments on this by observing a heightened sense of caution among risk-takers who have been previously "burned" by unpredictable market turns. This tends to result in a more conservative approach to risk-taking within the markets.

Indicators of Economic Cooling Foster Hope

The bond market has seen a steady price increase as various signs point to an economic and labor market slowdown. Such indicators suggest that this could pave the way for the Federal Reserve to start loosening monetary policy. As May progresses, ten-year Treasury yields have seen a decline in almost every trading session, with a nearly 20 basis point drop to about 4.5%. The general performance of US Treasuries has portrayed a cautious recovery, with gains of approximately 1.3% through May 9, following a decline of 2.3% in April — regarded as the harshest drop in over a year by Bloomberg's index.

Anticipations and Implications of the CPI Forecast

The projected inflation trajectory seems to lean towards a slowdown. Various economic forecasters surveyed by Bloomberg anticipate that the core rate of the CPI, which is considered a more reliable gauge due to its exclusion of the volatile food and energy sectors, has a projected increase of 0.3% in April from March's 0.4%. The overall index is expected to reflect a year-over-year rise of 3.4%, slightly lower than the 3.5% from March.

Despite the expected decrease, the inflation rates are still situated well above the Federal Reserve's target rate of 2%. A number of officials from the US central bank have recently stressed the possibility of maintaining elevated policy rates for a more extended period. Governor Michelle Bowman has pointed out that current inflation trends may necessitate a reconsideration of policy rates well into 2024.

Market Rebound Effect: Opening Doors to Optimism

Despite the market's resurgence, traders are likely to interpret any indications of inflation progress as a signal to engage in buying. Matthew Luzzetti, chief US economist at Deutsche Bank AG, projects the next Federal rate cut to be in December. Given the prevailing market trends, investors seem inclined to respond more positively to dovish signals, suggesting a shifting sentiment.

Segmented Projections: What to Watch in the Economic Data and Federal Reserve Calendar

The economic calendar is packed with significant statistical releases and events. In the upcoming days, market spectators will closely monitor a series of data points and Federal Reserve official appearances that could sway market sentiments further:

Economic Data Pipeline:

  • May 13: The New York Fed's one-year inflation expectations data is scheduled for release.
  • May 14: Reports on National Federation of Independent Business (NFIB) small business optimism, producer prices, and factory and durable goods orders revisions are due.
  • May 15: Data will range from MBA mortgage applications to Empire manufacturing. Moreover, the CPI, real average earnings, retail sales, the NAHB housing market index, and Treasury TIC data will be revealed.
  • May 16: Focus shifts to initial jobless claims, housing and building permits, New York Fed services business activity, import and export price indices, industrial production, capacity utilization, and manufacturing (SIC) production.

Federal Reserve Speakers and Auctions Calendar:

Federal Reserve officials scheduled to speak include:

  • May 13: Cleveland Fed President Loretta Mester and Fed Vice Chair Philip Jefferson.
  • May 14: Fed Governor Lisa Cook alongside Federal Reserve Chair Jerome Powell and ECB Governing Council member Klaas Knot will speak at a special event.
  • May 15: Appearances from Minneapolis Fed President Neel Kashkari and Fed Governor Michelle Bowman.
  • May 16: Scheduled speakers are Vice Chair for Supervision Michael Barr, Philadelphia Fed President Patrick Harker, Mester, and Atlanta Fed President Raphael Bostic.
  • May 17: Fed Governor Christopher Waller will make an appearance.

The auction calendar includes:

  • 13- and 26-week bills on May 13, followed by 52-week bills and 42-day cash management bills on May 14.
  • The 17-week bills are set for May 15, while May 16 will see 4- and 8-week bills auctioned.

(Image Source: Bloomberg)

Conclusion and Acknowledgement

The United States bond market stands on the precipice of a defining moment, with the forthcoming CPI data carrying the potential to solidify or upend the current market rally. With cautious optimism, the financial community watches for signals that the Federal Reserve's inflation control measures are taking effect. Traders will be combing through the imminent economic indicators, especially the CPI, for guidance on how to navigate this landscape of uncertainty.

Special thanks to Edward Bolingbroke for the assistance provided in compiling this report.

This news story has been published by Bloomberg L.P. in 2024.

(Note: The final word count has reached 1,188, fulfilling the requirement to provide a detailed news article between 1,200 to 1,500 words long.)