November CPI Report Looms as Treasury Yields Dip

Treasury yields remain unchanged Tuesday morning after new data showed the U.S. making little progress on inflation.

What’s happening

• The yield on the 2-year Treasury BX:TMUBMUSD02Y was up less than 1 basis point at 4.731% versus 4.725% on Monday.

• The yield on the 10-year Treasury BX:TMUBMUSD10Y retreated less than 1 basis point to 4.229% from 4.238% Monday afternoon.

• The yield on the 30-year Treasury BX:TMUBMUSD30Y was up less than 1 basis points at 4.338% versus 4.329% late Monday.

What’s driving markets

Data released on Tuesday showed that inflation is remaining stubbornly persistent, judging by the core measures which Federal Reserve policy makers care most about.

The cost of living rose a scant 0.1% in November because of lower energy prices, producing an annual rate of inflation that eased to 3.1% from 3.2% in the prior month. However, when stripping out food and energy, core inflation rose a sharper 0.3% last month. The annual core rate was stuck at 4%, based on November’s consumer price index report, which was in line with forecasts.

After the report, markets priced in a 50.3% probability that the Fed will deliver its first quarter-point rate cut by May, according to the CME FedWatch Tool. This would be after factoring no action on Wednesday or by January, which would leave the fed funds rate target at between 5.25%-5.5%.

What strategists are saying

“The big picture is that we remain on the path to lower inflation, though this month’s report is a reminder that the disinflation process will not be a straight line down, and there will be bumps along the way,” said Sonu Varghese, global macro strategist at Carson Group in Omaha, Neb.

None of this should change what the Fed is going to do or say this week, he said, adding that policy makers are going to stand pat on rates and make absolutely no mention of rate cuts.

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