The yield on US Treasury bonds declined moderately, while investors took a wait-and-see attitude ahead of the publication of US inflation data, which may cause a reassessment of the prospects for the Fed's monetary policy.
The yield on 5-year Treasury bonds fell by 1.7 basis points, reaching 3.88%, while the yield on 30-year bonds was 3.973% (-3.1 basis points). Meanwhile, the yield on 2-year Treasury bonds, reflecting expectations of short-term interest rates, decreased by 1.2 basis points to 4.498%, while the yield on 10-year bonds fell to 3.787% (-2.8 basis points). The curve between the 10-year Treasury yield and the 2-year yield remains inverted, sending a warning that the economy may be falling or has already fallen into recession. Now the gap between 10 and 2 year U.S. debt is 71 basis points.
As for the data, the Core PCE Price Index will be published at 12:30 GMT, as well as a report on personal income and expenses for April. Personal spending was virtually unchanged in March, increasing by a modest $8.2 billion. With the exception of a slight increase in January, real personal spending has declined in four of the last five months. Retail sales, by contrast, grew by a decent 0.4% in April. While consumers seem to be cautious about discretionary purchases, non-discretionary spending on categories such as healthcare and utilities led to a 0.7% increase in control group sales, which is likely to lead to a significant increase in the PCE Price Index in April. Nominal personal expenses are expected to have increased by 0.4% in April. If higher financing costs and tighter credit conditions weaken the labor market, consumers are likely to cut their spending more broadly later this year. Meanwhile, the decline in inflation continues to support the purchasing power of consumers. The real disposable income increased for the ninth time in a row in March, as the nominal income increased by 0.3%. Despite the fact that job growth has slowed down compared to their rapid pace at the beginning of the year, the tight labor market continues to hinder significant wage growth. According to forecasts, personal income and expenses increased by 0.4% in April. Experts warn that stronger than expected data on personal income and expenses, as well as on the Core PCE Price Index, may strengthen expectations of further tightening of the Fed's monetary policy. According to the CME FedWatch Tool, markets now see a 41.2% chance of a 0.25% rate hike at the next Fed meeting in June (versus 51.7% yesterday) and a 58.8% chance that they will remain unchanged (versus 48.3% yesterday).
Market participants will also continue to monitor developments around raising the US debt ceiling, as the June 1 deadline at which the U.S. could default on its debt obligations draws closer.