U.S. Treasury yields rose on Monday, powered by strong economic data from the previous week and anticipation for the Federal Reserve’s policy decision due this Wednesday. The recent economic indicators, such as firm inflation readings, solid retail sales, and rising oil prices, have pushed the towards its highest levels since the financial crisis of 2007-2008.
The market is almost completely factoring in that the Federal Reserve will keep interest rates within the 5.25%-5.50% range this Wednesday, according to the CME FedWatch Tool. However, the odds of a rate hike of 25 basis points to a range of 5.50%-5.75% at the subsequent meeting in November are currently pegged at just 28.7%.
Analysts from BofA Securities including Michael Gapen, Mark Cabana, and Alex Cohen foresee no alterations to the Federal Reserve’s balance sheet policies and predict it will maintain the target range for the federal funds rate at 5.25-5.5% at the September meeting. This expectation aligns with recent Fed communications and current market pricing.
The analysts also noted that investors’ attention will likely focus on the Summary of Economic Projections (SEP), set to be released alongside the Federal Open Market Committee (FOMC) statement. They project that the 2023 median policy rate forecast will reveal one more 25 basis point hike, leading to a terminal rate of 5.5-5.75%. They also anticipate that the 2024 median will rise by 25 basis points to 4.875%, implying a total of 75 basis points worth of cuts next year.
In other economic news from Monday, a sentiment index for U.S. home builders indicated a drop for September, falling below the breakeven level.
On the international front, U.K.’s 10-year government bond yields climbed by 4 basis points to 4.401% ahead of Wednesday’s consumer prices data release and the Bank of England’s policy decision due on Thursday. The majority of analysts forecast that the Bank of England will increase interest rates by 25 basis points to 5.5%.
In Asia, the Bank of Japan is expected to maintain its monetary policy unchanged this Friday. However, traders will be closely monitoring for any statements regarding plans to exit its negative-rate stance.
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