Insights

By Serafino Tobia, Director of Agency CMBS Trading and Portfolio, Greystone

US Treasuries

• The 10-year Treasury yield is currently 4.28%, 4 basis points lower since last Monday morning with a range of 11 basis points (4.24% - 4.35%) this past week.
• 2-year Treasuries are at 3.72% this morning, 3 basis points lower since last Monday.

10-year bonds gapped lower by 7-8 basis points Friday morning in response to Fed Chairman Powell’s keynote remarks at the Jackson Hole symposium.  Powell signaled that based on a shift in the balance of risks between a weakening labor market and higher inflation, he is open to cutting the Fed Funds rate at the September 17^th FOMC meeting.  

Last Week’s Economic Data 

Data last week was relatively light. The housing data showed mixed signals—current activity is strong, especially in multifamily starts, but with lower building permits, future momentum may be slowing. Weekly jobless claims may be showing early signs of weakness and August’s print of the S&P Global US PMI reflects a stable economy.

Hard Data

• Housing Starts - Housing starts jumped by more than 5% in July to 1.428 million, the best reading since February.  This was driven by a 10% spike in multifamily housing starts.
• Building Permits – Permits, a measure of future housing starts, were down 2.8%.
• Existing Home Sales – July existing home sales printed higher by 2%, rebounding after June’s -2.7% drop.
• Weekly Initial Jobless Claims - Unemployment claims printed at 235,000 for the week ending August 16, 11,000 more than the previous week.  One week’s data isn’t particularly concerning; we’ll have to see if this represents a trend to higher levels of claims. 

Soft Data (surveys)

• S&P Global US PMI Composite Index - The headline S&P purchaser managers composite index for August printed at 55.4 versus the forecasted 53.5 and the highest reading in 8 months. The index was solid for both manufacturing are services as well (all above 50, which represents expansion).

Fed Monetary Policy: ¼ point rate cut anticipated on September 17^th

On Friday during his keynote speech at the Kansas City Fed’s annual symposium in Jackson Hole, Fed Chairman Powell commented that “with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”  

Powell added that there are significant inflation risks (due to tariffs) as well as downside risk to employment (as reflected by the weak July employment report and 258k revisions to job growth in the previous two months, May and June). Powell indicated that a “reasonable base case” is that tariffs will cause a one-time jump in the level of prices (in other words, transitory).  He raised the possibility that tariff-related inflation could cause an increase in wages and add to more persistent inflation pressures. However, Powell views the likelihood of wage-price driven inflation unlikely (given the underlying weakness in the labor market).

Link to Fed Chairman Powell’s Jackson Hole speech  https://www.youtube.com/KansasCityFed

The bond market is now leaning hard (90% probability) for a ¼ point rate cut at the Fed’s next FOMC meeting on September 17^th – and rightfully so, based on Powell’s remarks on Friday.  The overnight Fed Funds rate is currently 4.33% (4.25%-4.50% target range); a ¼ point rate cut would bring it down to 4.08% +/-.   The yield curve implies a 0.57% cut in the Fed Funds rate by year-end and an additional 0.79% in rate cut in 2026 (a little more than three more ¼ point cuts). The Fed Funds rate is implied to move down to 2.97% by YE 2026.

My Take on Longer Term Yields             

The 10-year Treasury yield at around 4.25% is about right and reflects investors balancing a weakening labor market and persistent inflationary pressures. The July employment report and large revisions to job growth in May and June point to a slowing jobs market.  At the same time, inflation remains sticky above 2.8% on a PCE core basis and is anticipated to move higher over the next few months. The full impact of the tariffs is still unfolding, and it will take several months to work through the supply chains to ultimately affect consumer prices.

A cut in the overnight Fed Funds rate, with an improved tone and direction, will support the longer-term yields. However, I don’t expect 10-year yields to move substantially lower in the near term. The August employment report is due Friday September 5^th and will be a pivotal data point.  A weak print will reinforce the case for easing, while a rebound in hiring will challenge this view. Ahead of the September 17 FOMC meeting, we’ll also get additional inflation data:

• July PCE this Friday

• August PPI and CPI on September 10–11, respectively.

A rate cut at the September meeting is likely, but the broader debate around the labor market and tariff-driven inflation will persist. The extent to which tariffs influence wages and underlying inflation will be closely watched by the Fed and bond investors and ultimately reflected in yields.

This Week’s Economic Data

This week, the headlines will be on Friday, July PCE inflation and personal income and spending data.  This week, we will also see several regional Fed activity surveys, Conference Board Consumer Confidence, a 2^nd read on GDP Q2 and durable goods orders for July.