US Treasury yields fall on weak data and PMI contraction

US 10-year Treasury yield falls eight basis points sponsored by weak US economic data.
FOMC minutes note economic slowdown, open door for rate cuts if inflation approaches 2% target.
Significant ISM Services PMI drop to 48.8, and a decrease in ADP Employment Change pushed yields down.
Initial Jobless Claims increase to 238K, exceeding forecasts and previous readings.

Christian Borjon Valencia FXStreet

US Treasury bond yields sank on Wednesday after data from the United States increased the chances of the Federal Reserve easing policy as soon as September, according to the CME FedWatch Tool. Labor market data and weak Services PMI drove the US bonds rally and weighed on yields. The US 10-year benchmark note rate dropped almost eight basis points on Wednesday, down to 4.355%.

US 10-year benchmark note rate tanks amid rising expectations of a September rate cut following weak data

The latest FOMC minutes revealed that officials acknowledged the economy seems to be slowing, yet stated that if the disinflation process stalls, they would not hesitate to raise the fed funds rate. Policymakers added that the current policy is restrictive and mentioned they could ease policy once they're confident that inflation is headed toward its 2% goal.

In terms of data, US business activity in the services sector contracted after reaching its highest level since August 2023, according to the Institute for Supply Management (ISM). The ISM Services PMI for June dropped sharply to 48.8, its lowest since May 2020 and the fastest decline in four years, signaling recessionary conditions

This, along with a weaker ADP Employment Change report for June coming at 150K and missing estimates and the previous month’s data, could be a prelude to Friday’s Nonfarm Payroll numbers. Meanwhile, Initial Jobless Claims for the week ending June 29 rose to 238K, surpassing estimates of 235K and the previous reading of 234K.

According to the CME FedWatch Tool, odds for a 25-basis-point Fed rate cut in September are at 66%, up from 63% on Tuesday. Data from the Chicago Board of Trade (CBOT) shows that traders expect 38 basis points (bps) of easing, according to December’s 2024 fed funds rate futures contract.

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

Author

Christian Borjon Valencia

FXStreet

Markets analyst, news editor, and trading instructor with over 14 years of experience across FX, commodities, US equity indices, and global macro markets.

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