The yield of US treasury bond bonds generally fell on Monday (November 27). The yield of benchmark 10-year US treasury bonds continued the decline earlier this month after the monthly sales data of existing houses in the US fell more than expected. At present, market participants are further heating up their expectations for the Federal Reserve's interest rate cut next year. Unless Federal Reserve officials are particularly hawkish in their speeches before the silence period, or a series of heavyweight data released this week are hotter than expected, the overall trend of the current interest rate market may be difficult to easily change.
Market data shows that the overnight decline in US bond yields across different maturities is generally about 6-8 basis points. Among them, the 2-year US Treasury yield fell 6 basis points to 4.899%, the 5-year US Treasury yield fell 7.4 basis points to 4.417%, the 10-year US Treasury yield fell 7.9 basis points to 4.393%, and the 30-year US Treasury yield fell 6.3 basis points to 4.539%.
Although it climbed last week, the yield of the 10-year treasury bond bond has returned to below 4.40% at the beginning of this week, which is likely to record the largest monthly decline since the U.S. banking crisis in March. This is because investors generally believe that the cycle of interest rate increase by the Federal Reserve has ended and try to price when to cut interest rates. The poor performance of the two latest US economic data released overnight further increases market expectations for the Federal Reserve's interest rate cut next year.
According to data released by the US Department of Commerce on Monday, the total sales of new homes in the United States decreased by 5.6% in October, equivalent to an annualized rate, to 679000 units. This growth rate is lower than all expectations of industry media for economist surveys.
Another data released later also performed poorly: the Dallas Federal Reserve Business Activity Index for November in the United States recorded -19.9, with an expected value of -16 and a previous value of -19.2. This is the third consecutive month of decline in the index and the 19th consecutive month of contraction.
Jim Barnes, head of fixed income at Bryn Mawr Trust, said, "Economic data and central bank policies, as well as any information that appears in these two areas, are currently the key factors driving the rise or fall of US Treasury yields. You will see that yields are somewhat range constrained, but for me, this is the result of two factors guiding it, and today (Monday) investors are focused on weak economic data."
According to the Federal Reserve observation tool of the Chicago Mercantile Exchange, the likelihood of the Federal Reserve cutting interest rates by at least 25 basis points in May next year has now risen slightly above 50%, following a series of lower than expected US economic data, including inflation data from two weeks ago.
In the coming days of this week, investors will continue to receive multiple economic data releases, including important economic data such as Wednesday's Q3 GDP report, Thursday's Core Personal Consumption Expenditure (PCE) Price Index and Personal Income and Expenditure, and Friday's November ISM Manufacturing PMI. In addition, Federal Reserve Chairman Powell will join hands with at least seven Federal Reserve officials this week to deliver their final speeches before the silence period, and investors are expected to look for clues to the future path of the Federal Reserve's monetary policy.
When will the Federal Reserve cut interest rates? Goldman Sachs believes that this indicator needs to be considered
It is worth mentioning that in a recent outlook report, investment bank Goldman Sachs believes that the key to turning to interest rate cuts may lie in employment data, regarding the future direction of the Federal Reserve's interest rates and when it will usher in a true turning point in policy. If the US unemployment rate continues to rise, it will trigger the "Sahm Rule", and even if the US inflation rate has not yet reached the standard, the Federal Reserve may still cut interest rates.
The Sam's Rule successfully predicts every economic recession in the United States, defined as when the average three-month unemployment rate rises by 0.5 percentage points from the low point of the previous 12 months, the economy will enter a recession or be about to enter a recession. Since April, the US unemployment rate has risen by 0.33% based on a three-month average. According to the analysis of the previous non farm employment report, there is a high possibility of triggering the Sam's rule in the next three months.
Goldman Sachs analyst Cosimo Codacci Pisanelli stated in a report that with better than expected progress in fighting inflation and some signs of weakness in the job market, the question is where the threshold for the Federal Reserve's "non recession interest rate cut" is. The Federal Reserve's past stance has always been to wait and see, but further weakness in the labor market will drive a shift in trend.
Goldman Sachs mentioned that the next three months of US employment data may trigger the "Sam's rule", and next week's non-farm report is very important.
Regarding the year-end market, Goldman Sachs analysts believe that as economic data gradually weakens and the bond market prepares for bond supply in the first quarter of next year, the weeks leading up to the end of the year will be noisy: Federal Reserve officials may continue to lean towards hawkish rhetoric to prevent excessive relaxation of financial conditions, but the market may continue to counterattack the Fed's hawkish rhetoric as various economic indicators, especially labor indicators, slow down.
Goldman Sachs' suggestion is to retain some idle funds and patiently wait for the Federal Reserve's narrative to shift, which will come from a slowdown in the labor market.