Bond Yields Show Mixed Reaction as PCE Inflation Data Tempers Market Concerns, Oil Prices Remain a Source of Caution

U.S. Treasury Yields Mixed as Fed's Preferred Inflation Measure Aligns with Expectations

Key Takeaways

• The Federal Reserve's preferred inflation measure, the Personal Consumption Expenditures (PCE) price index, rose 0.3% in January, in line with economists' expectations.
• The PCE price index, excluding volatile food and energy components, increased 0.4%, a similar gain to December.
• U.S. Treasury yields were mixed, with the two-year note yield falling three basis points to 3.732% and the 10-year note yield rising one basis point to 4.283%.

Market Impact

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• The yield curve between two- and 10-year notes steepened by around three basis points to 55 basis points.
• Traders have pushed back expectations on when the U.S. Fed will cut rates due to rising oil prices, with expectations now indicating 22 basis points of cuts by year-end, down from more than 50 basis points before the war broke out.

Economic Outlook

• U.S. economic growth slowed more sharply in the fourth quarter than initially thought, mainly due to revisions in consumer spending and investment.
• The labor market has been in a fragile spot, and higher oil prices may not necessarily lead to a tighter path for Fed policy, given both sides of their dual mandate are affected.
• The Fed is expected to keep interest rates unchanged at its upcoming meeting on Wednesday, with traders focusing on comments from Chair Jerome Powell for clues on how higher oil will impact Fed policy.