Yields hit two-week low after soft manufacturing data

Benchmark US Treasury yields fell to a two-week low on Monday after data showed that US manufacturing activity slowed for a second straight month in May, boosting expectations that a softening economy may allow the Federal Reserve to cut interest rates later this year.

Manufacturing weakened as new goods orders dropped by the most in nearly two years, while a measure of input inflation fell back from the highest since mid-2022.

US construction spending also fell unexpectedly for a second consecutive month in April on declines in non-residential activity.

“On the one hand, this (manufacturing data) is another survey that seems to show pessimism and weaker economic activity. On the other hand, these surveys aren’t as reliable as they used to be,” said Will Compernolle, macro strategist at FHN Financial in New York.

Compernolle noted that the data “comes on the back of slower personal spending that we saw last Friday and a host of other things that people are looking to for weaker economic activity.”

Traders are gauging when the Fed is likely to begin cutting interest rates as inflation remains above its 2% annual target.

Friday’s personal consumption expenditures (PCE) price index for April showed that price pressures stabilized in the month while consumer spending slowed, boosting bets that the Fed could cut rates as soon as September.

Benchmark 10-year note yields fell 11 basis points to 4.402%, and got as low as 4.392%, the lowest since May 17.

Two-year note yields fell 8 basis points to 4.818% and reached 4.814%, the lowest since May 20.

The inversion in the two-year, 10-year yield curve deepened 4 basis points to minus 42 basis points.

This week’s main US economic release will be jobs data for May due on Friday, with May’s consumer price inflation report on June 12 the next major focus.

Other jobs data this week will include the Job Openings and Labor Turnover Survey (JOLTS) report for April on Tuesday and the ADP National Employment report for May on Wednesday.

Next week’s inflation data will be critical for setting Fed expectations, and investors will be looking for further signs that inflation is easing following higher-than-expected readings in the first quarter.

The Fed will also update its economic and interest rate projections when it concludes its two-day meeting on June 12.

(Reporting by Karen Brettell; Editing by Tomasz Janowski and Will Dunham)