Investors turned cautious with risk assets, following the recent sell-off in US Treasuries, due to the string of data releases that continued to indicate strength in the US economy which, in turn, tempered expectations of US Fed rate cuts.
With quarter-end rebalancing flows out of the way and strong US manufacturing data signaling sticky inflation, sellers pushed US Treasury yields higher by 8-13 basis points (bps) in anticipation of key economic data (US nonfarm payrolls and inflation).
Despite the sell-off, credit spreads, i.e., the difference in the yields of corporate bonds vs risk-free securities (risk-off sentiment = wider credit spreads), were generally unchanged as US Treasury yields did not materially break above the previous year-to-date highs.
- The US Personal Consumption Expenditures (PCE) Core Deflator, the Fed’s preferred measure of underlying inflation, came in as expected for the month of February at 0.3% month-on-month and 2.8% year-on-year.
- ISM Manufacturing PMI flipped to an expansionary reading at 50.3 vs. the 48.3 consensus expectation, which is the first expansionary reading since September 2022.
- The ISM Prices Paid component also came in hotter-than-expected at 55.8 vs. the 53.0 consensus expectation, signaling sticky inflation.
- Markets dialed back rate cut expectations with 2.7 cuts priced in for 2024. The odds for a June rate cut are close to 50/50, with a full rate cut priced in for July.