US yields drop as moderating inflation keeps Fed easing in 2024 intact
U.S. inflation rises moderately on April
Chicago PMI for May comes in much lower than expected
U.S. 2-, 10-, 30-year on pace for best monthly gain since December
U.S. yield, a bull flattener, slightly increases inversion
Adds new comment, bullets, Chicago PMI data, monthly milestones, and yield curve; updates prices
By Gertrude Chavez-Dreyfuss
NEW YORK, May 31 (Reuters) -U.S. Treasury yields fell on Friday after data showed U.S. inflation stabilized in April, in line with expectations, suggesting the Federal Reserve's interest rate cut plans later this year remained intact.
Analysts said the Fed may have to wait for several months of data showing inflation is decreasing before starting the easing cycle.
The personal consumption expenditures (PCE) price index, the Fed's preferred measure of inflation, rose 0.3% last month, data showed, matching the unrevised gain in March. Monthly inflation readings of 0.2% over time are needed to bring inflation back to target.
In the 12 months to April, the PCE price index rose 2.7% after climbing by the same percentage in March. Economists polled by Reuters had forecast it would climb 0.3% on the month and 2.7% on a year-on-year basis.
"This is a favorable report showing that core (inflation) is slowing and perhaps some of that seasonality that they have identified that has come in the first quarter of the year is coming off, and now we’re resuming the slowing that we saw in the second half of last year," said Michael Lorizio, senior fixed income trader at Manulife Investment Management in Boston.
"This has all shown continued progress towards what they have identified as their expectations for the end of 2024, seeing core PCE somewhere in that 2.6%-2.7% range. This month shows some significant progress and really, really a change from the trend that we had seen to begin the year in that first quarter, which displayed the seasonality that often does show up in the first quarter."
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased by 0.2%, but down from a downwardly revised 0.7% rise in March.
The benchmark 10-year yield slid 5.9 basis points to 4.494% US2YT=RR after the data. On the month, however, the 10-year yield rose 19.1 bps, on track for its best monthly gain since December.
U.S. 30-year yields were down 5.3 bps at 4.631% US30YT=RR, advancing 15.8 bps in May, the largest monthly rise since December as well.
On the front end of the curve, the two-year yield, which reflects the U.S. rate move expectations, slipped 1.7 bps to 4.912% US2YT=RR. For the month, two-year yields were up 16.9 bps, again the biggest monthly gain since December.
In addition, the Chicago purchasing managers' index (PMI), a barometer of business activity in the U.S. Midwest, came in at 35.4 vs a 41.0 estimate. May's reading was the lowest in four years.
The Chicago PMI data further pushed Treasury yields lower.
After the PCE and Chicago PMI reports, fed funds futures slightly increased the chances of a rate cut in September to around 55.3%, according to LSEG's rate probability app. It was slightly below 50% earlier this week.
The futures market is still pricing in just one rate cut of 25 bps this year.
The U.S. yield curve, meanwhile, marginally increased its inversion on Friday. The spread between U.S. two- and 10-year yields, widely viewed as a predictor of economic recessions, was at minus 38.6 bps US2US10=TWEB, compared with minus 38.3 bps late on Thursday. The inversion went as deep as minus 41 bps following the Chicago PMI report.
The current curve is effectively a "bull flattener," a scenario in which long-term interest rates are falling faster than shorter-dated ones. This often precedes a Fed rate cut, analysts said.
Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Karen Brettell; Editing by Josie Kao and Jonathan Oatis
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