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Treasuries Poised for 5th Straight Weekly Gain as Fed Hike Expectations Dwindle on Weaker US Data

US Treasury prices have rallied over the past month on slower growth concerns globally and domestically. Today’s move in Treasuries stemmed from softer US data that suggested US economic growth is slowing.

Two weeks ago, Fed Vice Chair Richard Clarida noted that gradual rate hikes are appropriate as monetary policy gets closer to its optimal longer-run setting. He noted the median of expected inflation 5-to-10 years in the future from the University of Michigan Surveys of Consumers is within–but I believe at the lower end of–the range consistent with price stability. Today’s preliminary December reading of the University of Michigan’s sentiment survey showed both the 1-year and the 5-to10- year inflation expectations declined. The 1-year inflation outlook dropped from 2.8% to 2.4% and the longer term fell from 2.6% to 2.4%.

All eyes on Wednesday’s US inflation report

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Next week, the November inflation numbers are expected to come in lower than a month ago. The forecast is for the monthly reading to fall from 0.3% to 0.0% and the annual reading to weaken from 2.5% to 2.2%. Softer inflation data could slow down the tightening cycle by the Fed.

Fed rate hike expectations

Current expectations are for 70.7% probability the Fed will raise interest rates by 25 basis points. The Fed is widely expected to adjust their dot plots at the Dec 19th meeting. The September meeting showed the Fed was expecting three more rate hikes in 2019, while many analysts are much lower, with some targeting just one hike in the new year.

10-Year Treasury Chart

Price action on the 10-year Treasury note daily chart shows that the recent rally is finding tentative resistance from the 121.000 level. The recent rally we have seen in bond prices accelerated once the yield on the 10-year Treasury fell below 3%, prices and yields move inversely. If price is able to take out the 121.150 level, we could further upside target the 123.500 level. To the downside, 117.500 remains critical longer-term support.

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