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US Treasury yields rose on Friday as investors focused on next week’s consumer price inflation report that may show that price growth accelerated in June, with the Federal Reserve expected to keep interest rates on hold as it waits to see the impact of tariffs on price pressures.
The European Union on Friday waited for a possible letter from US President Donald Trump outlining planned duties on his largest trade and investment partner after a broadening of his tariff war in recent days.
Yields rose overnight after Trump said the US would impose a 35% tariff on Canadian imports next month, said Tom di Galoma, managing director at Mischler Financial Group.
And now, “everybody’s got their eye on CPI next week. That could put the Fed into play if it comes in lower, or it could make them hold off if it comes in higher,” he said.
Fed Chair Jerome Powell has said he expects inflation to rise this summer, which makes the consumer price releases over the next few months key to Fed expectations.
“The CPI data from next week will be front and center,” said Jim Barnes, director of fixed income at Bryn Mawr Trust. “The market’s really not anticipating a move come July from the Fed and so from the market’s perspective they’ll be looking at the June, July, and August CPI data.”
“We have had a trend of somewhat benign inflationary data and if it maintains that, I think the market would view that as a positive. If you start to see that reverse out a little bit, that becomes somewhat problematic because is that the beginning of a new upward trend?” Barnes said.
Fed funds futures traders are pricing in 49 basis points of cuts by year-end, with the first rate reduction expected at the Fed’s September 16-17 meeting.
Chicago Fed President Austan Goolsbee said the new tariffs have further muddied the inflation outlook and might force the Fed to maintain its wait-and-see posture until the central bank gets more clarity.
US gross customs duties revenue grew to a record USD 27.2 billion in June as collections from the tariffs gained steam, combining with calendar shifts in receipts and outlays to produce a USD 27 billion federal budget surplus for the month, the US Treasury said on Friday.
The yield on benchmark US 10-year notes was last up 7.7 basis points on the day at 4.423%. Interest rate-sensitive two-year note yields rose 4.4 basis points to 3.912%.
The yield curve between two- and 10-year notes steepened by around three basis points to 51 basis points.
Traders pared expectations on how many times the US central bank will cut rates this year after data last week showed employers added more jobs than anticipated in June.
Trump has criticized Powell and said he is being too slow to cut rates.
The White House on Thursday launched a new attack on the Fed Chair, with a top Trump administration official saying Powell had “grossly mismanaged” the central bank, chastising him for running a deficit and for extensive cost overruns for building renovations.
The Treasury Department on Friday also sought dealer feedback on the market’s capacity to absorb additional issuance of Treasury bills as it rebuilds its cash balance following the increase in the debt ceiling and faces a worsening budget deficit.
The survey was part of Treasury’s normal procedure ahead of its quarterly refunding announcement, which is next due later this month.
US Congress last week passed a tax and spending bill that increases the debt ceiling by USD 5 trillion. Treasury said on Tuesday it will build its cash balance to USD 500 billion by the end of July by increasing its issuance of Treasury bills.
(Reporting by Karen Brettell; Editing by Hugh Lawson and Diane Craft)
