Treasury yields slightly lower as China sees deflation and traders eye U.S. inflation data

The July consumer price index data in particular will color the thinking of the Federal Reserve in September as it tries to headline inflation down to its 2% target.

Helping damp yields was news from China, where consumer prices fell 0.3% for the year to July, the first move into deflation for more than two years, while factory gate prices fell 4.4%.

Markets are pricing in an 87% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on September 20, according to the CME FedWatch tool.

The chances of a 25 basis point rate hike to a range of 5.50 to 5.75% at the subsequent meeting in November is priced at 28%.

The central bank is not expected to take its Fed funds rate target back down to around 5% until May 2024, according to 30-day Fed Funds futures.

There are no U.S. economic updates of note due Wednesday. The Treasury will auction $38 billion of 10-year notes at 1 p.m. Eastern.

What are analysts saying

The ‘Fed Watcher’ analyst team at Deutsche Bank have published a note parsing recent comments by the central bank’s officials.

“[A]ll officials agree that the September meeting decision would be highly data dependent. With risks turning increasingly two-sided, Fed officials are beginning to shift the focus toward how long to hold rates steady at sufficiently restrictive levels.”

“These comments are consistent with our latest analysis where we considered what policy rules would imply for the timing and pace of rate cuts under different economic scenarios. We found that in most scenarios, the Fed is likely to begin to cut rates in the first half of 2024 and that significant rate reductions could follow over the remainder of the year.” said the Deutsche Bank team.