Yields little changed by jump in US consumer prices

NEW YORK: The Treasury market on Thursday brushed off the biggest gain in US underlying consumer prices in 1-1/2 years, as it did little to change expectations the Federal Reserve will cut interest rates later this month.

The Labor Department reported its consumer price index - excluding the volatile food and energy components - rose 0.3% in June. That is the largest increase since January 2018 and followed four straight monthly gains of 0.1%. The so-called core CPI was boosted by strong increases in the prices for apparel, used cars and trucks, as well as household furnishings.

Inflation has consistently undershot the Fed's 2% target and has been cited as a risk by the central bank as it weighs cutting interest rates in July for the first time since 2015.

"The Fed has left itself two paths to a rate cut. One is inflation-shortfall-based and that is fading with this morning's CPI data. The other is insurance-based," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.

On Wednesday, Fed Chair Jerome Powell delivered testimony to Congress and the bank published minutes from its rate-setting committee's June meeting, both of which cite the risks of slowing global growth and the US trade war with China. "It seems policymakers are more focused on an insurance rate cut - insurance against future growth shortfall."

That explains the market's lack of a reaction to the inflation data. The two-year yield, a proxy for market expectations of changes in rate policy, rose initially, but retraced most of those gains, last up less than a basis points at 1.836%. The benchmark 10-year made less of an initial move, but retained the gains, with its yield last up 1.6 basis points at 2.077%.

The chance of a 50-basis point cut fell on Thursday to 24.5% from 29.2% on Wednesday, according to CME Group's FedWatch tool. A 25-point cut has been fully priced in by the market, however, and was not altered by the inflation report.

"You have to guess Jay Powell had this data point on his desk yesterday," said LeBas.

Later Thursday, the Treasury Department will auction $16 billion of 30-year notes. Demand is expected to be strong: "The 30-year has been soft for the last couple days ... so I think we're setting up for pretty good demand at auction," said LeBas.