U.S. Treasury yields turned mixed Thursday morning, with the policy-sensitive 2-year rate slipping back below 5%, as fed funds futures traders boosted the chances of no further interest-rate action by the Federal Reserve this year.

What’s driving markets

As of Thursday morning, traders priced in a 97% probability that the Fed will leave interest rates unchanged at a range of 5.25%-5.5% at its policy meeting on Sept. 20. Meanwhile, the chance of the central bank also standing pat at the subsequent meeting in November inched up to 63.3%, according to the CME FedWatch Tool. And traders boosted the likelihood of no action in December to 58.1% as they continued to absorb Wednesday’s mixed reading on the August consumer price index. Data released on Thursday showed the August producer
price index climbed a better-than-expected 0.7% last month. Separately, retail sales advanced 0.6% in August and weekly initial jobless benefit claims rose by 3,000 to 220,000 in the week that ended Sept. 9.

Meanwhile, the benchmark German 10-year bund yield BX:TMBMKDE-10Y was down 6.1 basis points at 2.594% after the European Central Bank lifted its interest rates by 25 basis points and signaled that may be the last hike.

What analysts are saying

Fed funds futures trading that implies no further action by the Fed in 2023 “is a little inconsistent with the short-term data we’ve seen,” said Gregory Faranello, Head of U.S. Rates for AmeriVet Securities in New York. “In the context of the data, PPI was hotter than expected, CPI was as expected with inflation still sticky, and initial jobless claims are pointing to a relatively decent labor market.” Via phone, Faranello said he expects the Fed’s Summary of Economic Projections, released next Wednesday, to continue to reflect one more 25 basis point rate hike for this year.

-By: Vivien Lou Chen and Jamie Chisholm