Bond yields fall ahead of the inflation report for August

US Treasury yields were lower on Tuesday as markets braced for another key inflation reading that could help set the path for rate hikes by the Federal Reserve.

The benchmark 10-year Treasury yield was lower by almost 5 basis points, trading at 3.314%. The yield on the 30-year government bond fell 4 basis points to 3.473%.

Meanwhile, the yield on the 2-year Treasury also fell more than 4 basis points to 3.526%. Yields move inversely to prices, and a basis point is equal to 0.01[ads1]%.

On the data front, investors will watch the release of the US Consumer Price Index report for August.

Markets are pricing in a 9-in-10 chance that the Federal Reserve will raise interest rates by 75 basis points for a third time next week, but bond markets are essentially signaling that markets believe the inflation trajectory is on the way down.

On Monday, the New York Fed’s Survey of Consumer Expectations showed that in August Americans expected inflation to be 5.7% one year ahead. That’s down from 6.2% in July and the lowest reading since October 2021.

The prices of energy, used cars and even food have decreased slightly. But there is a key difference between inflation in goods and services, Cesar Perez Ruiz, chief investment officer at Pictet Wealth Management, told CNBC’s “Capital Connection” on Tuesday.

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“(Decreasing) commodity inflation will bring that inflation down, but what we really need to look for in the numbers are two things: one is the median CPI (consumer price index), and the other is the core CPI. Because that services inflation – Rent, which continues to go higher, wages that continue to be higher is the one that is going to determine the most important thing that we all look at to keep this risk on: when and what is going to make the Fed swing, Ruiz said.

However, the wealth management firm sees overall economic sentiment continuing to ease, forecasting a mild US recession and a 0.8% decline in GDP growth in 2023.

For rate hikes, “Our view is 75, 50, then 25 (basis points),” Ruiz added. “We don’t expect cuts next year, the key question is what will make them swing.”

Bond yields fall ahead of the inflation report for August

Meanwhile, Credit Suisse sees the Federal Reserve ending its rate hikes sooner than expected due to falling inflation, which could lead to a market rally, the bank’s chief U.S. equity strategist told CNBC on Monday.

“This is actually what’s being priced into the market broadly,” Jonathan Golub said. “All of us see when we go to the gas station that the price of gas is down, and the oil is down. We see it ourselves with food. So it’s really showing up in the data already. And there’s a really big potential positive.”

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