US Treasuries
- The 10-year Treasury yield is currently 4.64%, higher by 10 basis points since last Monday morning. 10-year bonds traded in a 17-basis point range (4.54% - 4.71%) this past week.
- 2-year Treasuries are at 4.32% this morning, 15 basis points higher than last week.
Trading Recap – This morning, Treasury yields opened 4-5 basis points lower across the yield curve with the US pausing bomb strikes for the past 3 days and a 7-8% drop in crude oil prices. Last week, bond yields ran higher with the US re-starting the conflict 13 days ago. As noted last Monday, the Iranian-backed Houthi militia in Yemen threated to disrupt shipping through the Bab el-Mandeb Strait, the gateway to the Red Sea; on Thursday the threat materialized with the Houthis attacking two Saudi oil tankers and expanding the conflict beyond Iran and the Strait of Hormuz. Markets are now grappling with heightened uncertainty over the Iran conflict’s trajectory - the possibility of de-escalation with this current 3-day ceasefire versus the possibility of a renewed and broader conflict in the Middle East.
Last Week’s Economic Data (Selected Highlights)
Economic data this past week was relatively light and reflected a stable economy. Weekly Initial jobless claims came in at 187k, below both the prior week's 209k reading and consensus expectations of 211k, consistent with a low hire/low fire labor market. Last Friday, new home sales for June printed at 628,000, versus 580,000 in May. The July preliminary read of the S&P Global Manufacturing PMI and the Services PMI both printed above the 50 level that separates expansion from contraction for the economy.
Fed Monetary Policy
The Fed’s FOMC meets tomorrow and Wednesday and is expected to remain “on hold” with interest rates, despite the recent uncertainty created with the escalation with the Iran War.
Watch what the Fed Watches:
- Employment - The labor market has shown signs of cooling. Nonfarm payrolls increased by just 57k jobs in June, well below the 113k consensus forecast, with meaningful downward revisions to both April and May job growth figures. Although the unemployment rate printed at 4.2%, this was largely the result of a sharp decline in labor force participation; approximately 700k people exited the workforce. Taken together, the data suggest labor market conditions are softening, even with headline unemployment at 4.2%.
- Inflation - Both June CPI and PPI inflation readings were below consensus forecasts, indicating that underlying price pressures had been moderating before the recent surge in energy prices. Headline CPI declined -0.5% month-over-month, driven primarily by a 9.7% drop in gasoline prices. Core CPI, excluding food and energy, was unchanged at 0.0% for the month, suggesting underlying inflation pressures remain contained. These readings support the view that inflation could continue to improve if geopolitical tensions ease and crude oil prices stabilize.
- Inflation from the Iran war - The inflationary impact of higher crude oil prices is a wild card. Arguably, energy price increases will eventually work through the economy and produce higher inflation. However, higher crude oil prices are not yet in the core inflation data, and we could see the Iran conflict de-escalate over the near term and crude oil prices improve again back to ~$70/barrel. Further, Warsh, as Trump’s appointee, is unlikely to want to move rates higher as a pre-emptive measure.
The Fed funds rate remains at 3.63% (target range 3.50%-3.75%). According to the shape of the yield curve, the markets imply an 8.4 basis point increase in the Fed Funds rate on Wednesday (a 33% chance of a 0.25% rate increase). The bond market is now implying a 26-basis point increase at the September 19th FOMC meeting, effectively pricing in one quarter-point rate increase. The yield curve also implies a second 0.25% increase in the first quarter of 2027.
My Take on Longer Term Yields
With 10-year Treasuries printing over 4.70% last week, we probably saw the high-end of the likely range over the near term. 10-year yields are reflecting investors front running inflation pressures from additional uncertainty around the Iran war, higher crude prices, and renewed tariffs from the Administration.
A full range of scenarios for the Iran war and crude oil prices are at the core of the uncertainty. NY WTI crude oil is currently just shy of $83/barrel, down from ~$90/barrel as of Friday. Crude oil was just below $70/barrel earlier in July prior to the re-start of US bombing. Crude oil prices could fall back to $70/barrel quickly if the current ceasefire extends and crude oil shipments resume. However, a wider expansion of the war in the region could have oil prices move to $100/barrel or higher.
The June subdued inflation data was promising, particularly with core CPI printing no change (0.0%). With the November midterms fast approaching, it’s likely that the Administration will find a path for de-escalation over the next few weeks. If the war is pushed away from the headlines and we see improved crude oil prices, inflation expectations and yields will also improve and we are likely to see back to 4.50% or below in short order.
This Week’s Economic Data
This week's economic calendar is highlighted by the June PCE Price Index, the advance estimate of second-quarter GDP, the Employment Cost Index, and the University of Michigan Consumer Sentiment survey, including one-year and five-year consumer inflation expectations. The bond market's primary focus, however, will be news about the Iran war and crude oil prices and Wednesday's FOMC rate decision, policy statement, and Fed Chairman Kevin Warsh's press conference for clues on the future monetary policy.
The information provided in this article, including, without limitation, any opinions, predictions, forecasts, commentaries or suggestions, is for informational purposes only and should not be construed to be professional or personal investment, financial, legal, tax or other advice.