US yields mixed as data void fogs interest rate outlook
- Federal Reserve's data dependency affects rate cut expectations
- Dissent within FOMC surprises markets, affects rate outlook
- Market estimates for December rate cut drop to 62%
By Tatiana Bautzer
U.S. yields were mixed on Friday as the outlook for monetary policy was becoming increasingly foggy due to the prolonged federal government shutdown reducing the availability of macroeconomic data.
Comments by Federal Reserve Chair Jerome Powell after the interest rate cut on Wednesday poured cold water on the optimism for another 25-basis-point ease in December.
"He basically reminded markets that the Fed is still data-dependent and there is no data at the moment," said Gennadiy Goldberg, TD Securities' head of U.S. rates strategy in New York.
On Friday, the yield on the benchmark U.S. 10-year Treasury note (US10YT=TWEB) fell 0.6 basis points to 4.087%. The 10-year yields were almost 10 basis points higher than a week ago.
The two-year (US2YT=TWEB) U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, fell 0.8 basis points to 3.606%. Compared to last Friday, yields rose 11 basis points.
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes (US2US10=TWEB), seen as an indicator of economic expectations, was at a positive 47.9 basis points.
Dissent within the Federal Open Market Committee surprised markets with Kansas City Fed President Jeffrey Schmid voting to hold rates steady, citing inflation risks. Federal Reserve Bank of Dallas President Lorie Logan added on Friday that she saw the Wednesday rate cut as not needed. Governor Stephen Miran, meanwhile, voted for a 50-basis-point rate cut, marking the first two-sided dissent since September 2019.
While the government shutdown continues, policymakers, like the rest of the market, have to settle for discerning economic conditions from secondary private sector data. Even if the divided Congress manages to reach a spending deal in the coming days, it is almost certain that next week's payrolls report will not be released, meaning the Fed will not have a clear picture of the economy.
On Friday, markets estimated a 62% chance of a further rate cut in December, according to CME's FedWatch tool, sharply down from the 90% before the FOMC meeting.
But analysts believe Powell's message had a longer-term effect. The Fed funds curve was pricing by mid-October a reduction of 90 basis points over the next six Fed meetings, according to a report to clients on Friday by BMO Capital Markets.
"On Thursday, the Fed funds curve has priced in slightly more than 60 (basis points) of easing over the same timeline," the report by analysts led by Ian Lyngen said.
