Yields mixed as PCE eases fears but oil keeps markets cautious

NEW YORK – US Treasury yields were mixed on Friday after data showed the Federal Reserve’s preferred inflation measure was in line with economists’ expectations in January, while concerns over oil prices kept investors nervous about an uptick in price pressures.

The Personal Consumption Expenditures price index increased 0.3% in January after rising 0.4% in December. Excluding the volatile food and energy components, the PCE price index rose 0.4% after a similar gain in December.

“The January core PCE wasn’t quite as bad as feared,” said Matt Bush, US economist at Guggenheim Investments.

The two-year note yield, which typically moves in step with Fed interest-rate expectations, fell three basis points to 3.732%. The yield on benchmark US 10-year notes rose one basis point to 4.283%.

The yield curve between two- and 10-year notes steepened by around three basis points to 55 basis points.

Traders this week have pushed back expectations on when the US Fed will cut rates as oil prices jump on supply disruptions caused by the US-Israeli war on Iran.

Crude futures climbed on Friday as the Strait of Hormuz remained closed, but analysts were wary the weekend might bring surprise changes in the status of the war two weeks after it started.

Traders are pricing in 22 basis points of cuts by year-end, down from more than 50 basis points before the war broke out, indicating rising doubts the Fed will make a second 25-basis-point cut by end-2026.

Some analysts and economists view the pricing as potentially having gone too far.

“You would need to see a very large rise in energy sustained for several months to really have a meaningful impact on core inflation,” said Bush, adding, “The second component here is that an energy shock also is negative for economic growth in the labor market.”

“The labor market has already been in a fragile spot. So it’s not clear-cut to me that higher oil prices would necessarily lead to a tighter path for Fed policy, given both sides of their dual mandate are going to be affected,” Bush said.

Concerns over the recent surge in oil prices have largely overshadowed an unexpectedly weak
jobs report for February.

“Front-end USD rates are likely to continue to trade with energy prices over the near term, however a protracted conflict can shift the focus from inflation to growth,” Wells Fargo macro strategists said on Friday in a report.

Other data on Friday showed that US economic growth slowed more sharply in the fourth quarter than initially thought, while US job openings increased in January, though hiring was lackluster.

The Fed is expected to keep interest rates unchanged at the conclusion of its two-day meeting on Wednesday.

Traders will focus on comments from Chair Jerome Powell for clues on how higher oil will impact Fed policy going forward. Policymakers will also update their interest rate and economic forecasts.

However, “The Fed has a relatively high bar to out-hawk market expectations,” Wells Fargo said.

(Reporting by Karen Brettell; Editing by Pooja Desai and Sharon Singleton)