(Bloomberg) — Treasuries gained ahead of the release of US inflation data, paring sharp losses sparked by the temporary US-China trade truce that’s dimmed the odds of a global recession.
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With market-implied expectations for Federal Reserve interest-rate cuts receding and a multi-trillion-dollar tax package seen likely to worsen the US government budget deficit, focus is now on Tuesday’s inflation data for any signs of a pickup in price pressures. The report will be the first to show tariff-related costs.
The yield on policy-sensitive two-year bonds fell three basis points to 3.98% on Tuesday, outperforming European peers. The rate surged 12 basis points on Monday after the world’s biggest economies agreed to temporarily cut tariffs, dimming the odds of a recession and fueling a rally in risk assets.
“The ‘trade-relief rally’ has started to stall overnight,” said Evelyne Gomez-Liechti, a strategist at Mizuho International. The moves reflect “profit-taking and consolidation ahead of today’s CPI report. We think there’s room for more.”
Economists forecast the annual pace of consumer price growth held the same as the month prior, according to estimates compiled by Bloomberg. Core inflation is expected to remain at a 2.8% level.
Traders have lowered their expectations for Federal Reserve interest-rate cuts this year amid easing trade tensions, and swaps now favor a quarter-point cut by September and another to follow by year-end. At the end of last month, markets were betting on a first move by July, and a total of four cuts this year.
Goldman Sachs (GS) said Monday that it now expects three quarter-point rate Fed cuts starting in December instead of July, with just a 35% probability of a recession versus 45% previously. Citigroup economists also pushed back their prediction for the Fed’s next rate cut to July from June after tempering of US-China tariffs.
“If you have to put a gun to my head and say what’s the most likely single view it probably would be that the Fed maintains rates on hold this year because inflation stays pretty elevated,” said Mark Dowding, chief investment officer of BlueBay Fixed Income.
Fed Governor Adriana Kugler said even with the 90-day levy reduction on Chinese goods, President Donald Trump’s tariff policies risk sparking a rise in inflation and unemployment.
