10-Year Treasury Yield Exceeds 4%; Fed's Musalem Sees Gradual Rate Cuts; China Stimulus Disappointment

10-Year Treasury Yield Exceeds 4%; Fed's Musalem Sees Gradual Rate Cuts; China Stimulus Disappointment By Hardika Singh

Benchmark 10-year Treasury yields climbed above 4% for the first time in about two months Monday, reflecting a continued rethink about the path of short-term interest rates after Friday's surprisingly strong jobs report.

The yield on the 10-year U.S. Treasury note settled at 4.025%, according to Tradeweb, marking its highest closing level since July 31. That was up from 3.980% Friday and 3.849% Thursday before the jobs report.

Monthly jobs reports have been a major driver of Treasury yields in recent months. Weak payrolls data helped push the 10-year yield below 4% in early August, as investors worried the economy might finally be buckling under the pressure of high interest rates.

Friday's report, combined with some other recent encouraging economic data, has led to another swing in sentiment-with traders now betting on a much more gradual cut in rates than they expected just a few weeks ago.

Interest-rate futures showed Monday that investors think there is a roughly 86% chance that the Federal Reserve will cut rates by 0.25 percentage point at its next meeting in November and a 14% chance that it won't cut rates at all, according to CME Group.

Before the jobs report, traders saw a 32% chance that the Fed would cut rates by 0.5 percentage point for the second consecutive meeting.

Top News Fed's Musalem Sees Gradual Interest Rate Cuts Ahead

Federal Reserve Bank of St. Louis President Alberto Musalem sees a soft landing ahead, aided by the central bank easing off high interest rates and strong productivity growth from the U.S. economy, reports Barron's. Cooling inflation should clear the way for continued interest rate cuts ahead.

"I believe it will likely be appropriate to further reduce the target range for the federal-funds rate over time toward a neutral posture," Musalem said in prepared remarks for an event hosted by the Money Marketeers of New York University on Monday evening. He was referring to the theoretical interest rate which neither stimulates nor restricts economic growth.

Musalem noted that the timing and magnitude of those future rate cuts would depend on the incoming economic data and the balance of risks to the Fed's dual mandates of ensuring price stability and maximum employment. Musalem said that his baseline forecast is for continued "solid" gross domestic product growth, with a "healthy" labor market and inflation closing in on a 2% annual rate.

Musalem took over as president of the St. Louis Fed in April. He will be a voting member of the Federal Open Market Committee-the Fed's policymaking body-in 2025.

Fed's Kugler Says She Supports More Rate Cuts if Inflation Recedes

Federal Reserve Gov. Adriana Kugler said Tuesday she supported further interest-rate cuts, with the speed dependent on the outlook for employment and inflation. Speaking at a European Central Bank event in Frankfurt, Kugler said she strongly supported the half-point rate cut in September, MarketWatch reports.

"If progress on inflation continues as I expect, I will support additional cuts in the federal funds rate to move toward a more neutral policy stance over time," she said.

"If downside risks to employment escalate, it may be appropriate to move policy more quickly to a neutral stance. Alternatively, if incoming data do not provide confidence that inflation is moving sustainably toward 2%, it may be appropriate to slow normalization in the policy rate."

China's Stock Market Fever Breaks as Authorities Disappoint

An epic Chinese stock market rally lost steam Tuesday after a press conference by the country's economic planning agency disappointed hopes for more fiscal stimulus measures and raised questions about whether Beijing has more to offer the ailing economy.

The letdown dampened a wave of euphoria that had gripped investors in China in recent weeks, as hopes for large-scale Chinese government support for the world's second-largest economy propelled stock prices on one of their giddiest runs in recent memory.

Australia's Central Bank Remains Fearful of Resurgence in Inflation

The Reserve Bank of Australia remains concerned about a resurgence in inflation , which is likely to prevent it from joining the global rush by central banks to lower interest rates, at least in the near term. In minutes of its policy meeting in late September, the board of the RBA said it "remains vigilant to upside risks to inflation."

Pro Take: A Tale of Two Inflation Indexes and What They Say

The Atlanta Fed tracks two types of inflation: sticky and flexible. What they are telling us is that inflation has fallen dramatically on consumer-sensitive items-even dipping into negative territory in recent months-and that housing distorts the data, writes Bob Fernandez for WSJ Pro.

"There is a sort of disconnect between where shelter prices are and everything else," said Brent Meyer, an economist at the Atlanta Fed who helped develop the sticky index more than a decade ago. "Here we have a price that is behaving fundamentally different." Read more .

U.S. Economy The True Cost of Losing Your Home in a Hurricane (After Insurance)

Storms like Hurricane Helene need only minutes to devastate people's finances . Even those with decent insurance and thousands in government support need many years to recover.

Arizona Voters at Breaking Point Over Cost of Electricity

Gasoline is often the energy cost voters think about most. But in Arizona, electricity is giving it a run for its money . Rate increases, and a historic 113 consecutive days of temperatures peaking at or above 100 degrees in Phoenix, have generated record air conditioning bills and widespread consternation.

The Great Florida Migration Is Coming Undone

Anthony Holmes was part of the great Florida migration . In 2021, he moved from Virginia to a gated suburban community in Tampa. Now that he has had to leave, Holmes is another victim of a glutted housing market where buyers are increasingly hard to find.

In America's Factories, Even the Robots Are Getting Less Work

Robots are getting less work at U.S. factories. Manufacturers are cutting back on purchases of automation equipment, executives said, as business slows on production lines and shop floors. More human workers are lining up for work again, too.

Forward Guidance Tuesday (all times ET)

6 a.m.: NFIB Index of Small Business Optimism

8:30 a.m.: U.S. trade deficit

12:45 p.m.: Fed Bank of Atlanta President Raphael Bostic speaks at Atlanta consular corps luncheon

Wednesday

8 a.m.: Fed Bank of Atlanta President Raphael Bostic welcome remarks to the Greater Atlanta Home Builders Association

10 a.m.: Monthly wholesale trade

2 p.m.: Federal Open Market Committee meeting minutes and economic forecast

6 p.m.: Fed Bank of San Francisco President Mary Daly speaks at Boise State University event

7 p.m.: Fed Bank of New York President John Williams begins two-day visit to New York State's Southern Tier region

Research Buying Dollars Could Be a Way to Hedge Geopolitical Risk

Buying dollars appears to be a good way of hedging against geopolitical risk, including the risk of escalating conflict in the Middle East, and ahead of U.S. elections, BNP Paribas strategists say in a research note. Geopolitical risk has been underpriced, while investors are positioned short on the dollar, betting on average that the currency will fall, they say. Though BNP Paribas is positive on the euro, it considers it prudent to add dollar hedges, especially against currencies with weaker fundamentals, the strategists say. - Jessica Fleetham

Basis Points Consumer credit rose $8.9 billion in August, after surging a revised $26.6 billion in July, the Federal Reserve said Monday. The August gain translates into credit growth at a 2.1% annual rate, down from a 6.3% rise in the prior month. (MarketWatch) Housing sentiment has improved significantly, with a record share of consumers optimistic about mortgage rates falling over the next 12 months, a new survey by Fannie Mae found. (MarketWatch) Hurricane Milton rapidly intensified into a Category 5 storm on Monday, threatening to bring additional storm surge and flooding later this week to a battered Florida that is still recovering from the devastating effects of Hurricane Helene. Vice President Kamala Harris is proposing a new Medicare benefit for in-home eldercare, part of a pitch to middle-aged voters who are grappling with the dual cost of raising children and attending to their aging parents. Dockworkers at Port of Montreal won't work overtime in an attempt to ramp up pressure on employers as efforts to agree on a labor deal drag on. German industrial production rose at its fastest pace this year in August, largely a result of a rebound in the country's key car industry, though output only offset the fall in the prior month as the manufacturing sector continues to be a drag on the economy. European distiller stocks dropped after China said it would impose antidumping tariffs on brandy imported from the European Union, deepening tensions between the two trading powers. How closely is demand for $3,000 handbags tied to home prices in China? Quite closely, it turns out , which is unfortunate for luxury brands. The world's youngest country is facing one of the world's worst economic crises . South Sudan, which broke off from Sudan in 2011 after decades of civil war, is battling severe floods, a collapsing currency and a catastrophic falloff in revenue from oil, its main export. About Us

WSJ Pro Central Banking brings you central banking news, analysis and insights from WSJ's global team of reporters and editors. This newsletter was compiled by markets reporter Hardika Singh in New York. Send your tips, suggestions and feedback to [hardika.singh@wsj.com].

This article is a text version of a Wall Street Journal newsletter published earlier today.

(END) Dow Jones Newswires

October 08, 2024 07:16 ET (11:16 GMT)

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