US yields drop as receding inflation keeps Fed cuts intact this year

NEW YORK – US Treasury yields fell on Friday after data showed US inflation stabilized in April, in line with expectations, suggesting the Federal Reserve’s interest rate cut plans later this year remained intact.

Analysts said though the Fed will rely on several months of data showing inflation is firmly decreasing before starting the easing cycle.

The personal consumption expenditures (PCE) price index, the Fed’s preferred measure of inflation, rose 0.3% last month, data showed, matching the unrevised gain in March. Monthly inflation readings of 0.2% over time are needed to bring inflation back to target.

In the 12 months to April, the PCE price index rose 2.7% after climbing by the same percentage in March. Economists polled by Reuters had forecast it would climb 0.3% on the month and 2.7% on a year-on-year basis.

“It’s nice to see core PCE not re-accelerating further from the hotter-than-expected numbers that we saw earlier in the year,” said JoAnne Bianco, investment strategist and partner at BondBloxx Investment Management, which manages 24 fixed income exchange-traded funds totaling about USD 3 billion.

“That’s a step in the right direction,” Chicago-based Bianco said, adding though that it was not enough.

Consumer spending, which accounts for more than two-thirds of US economic activity, increased by 0.2%, but down from a downwardly revised 0.7% rise in March.

The benchmark 10-year yield slid 4.6 basis points (bps) to 4.508% after the data. On the month, the 10-year yield declined 17.6 bps, on track for its worst monthly drop since December.

US 30-year yields were down 3.4 bps at 4.651%, sliding 13.8 bps in May, the largest monthly fall since December as well.

On the front end of the curve, the two-year yield, which reflects the US rate move expectations, slipped 1.7 bps to 4.912%. For the month, two-year yields were down 15.9 bps, again the biggest monthly drop since December.

In addition, the Chicago purchasing managers’ index (PMI), a barometer of business activity in the US Midwest, came in at 35.4 vs a 41.0 estimate. May’s reading was the lowest in four years.

The Chicago PMI data further pushed Treasury yields lower.

After the PCE and Chicago PMI reports, fed funds futures slightly increased the chances of a rate cut in September to around 55.3%, according to LSEG’s rate probability app. It was slightly below 50% earlier this week.

The futures market is still pricing in just one rate cut of 25 bps this year.

“This one PCE reading is meaningless. It won’t change Fed Chair (Jerome) Powell’s stance at the upcoming meeting. The up and down of the monthly inflation readings lends to caution,” wrote Gregory Faranello, head of US rates at AmeriVet Securities, in a research note.

“It’s completely fair and honest to admit the Fed’s not even sure. And the recent interviews, q/a (question and answer), and speeches lend themselves to that. A lot remains out of the hands of central bank policy in our view.”

The US yield curve, meanwhile, marginally reduced its inversion on Friday. The spread between US two- and 10-year yields, widely viewed as a predictor of economic recessions, was at minus 37.9 bps, compared with minus 38.3 bps late on Thursday. The inversion went as deep as minus 41 bps following the Chicago PMI report.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Josie Kao and Jonathan Oatis)