The two-year Treasury yield edged up from its highest level in almost 15 years on Wednesday, despite a second straight monthly drop in the costs for U.S. wholesale goods and services, as traders continued to digest an unexpectedly hot consumer-price index for August.
What’s happening?
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The yield on the 2-year Treasury
TMUBMUSD02Y,
3.771%
rose to 3.788%, following a surge of 18.3 basis points to 3.754% on Tuesday. That marked the biggest one-day gain since Aug. 5 and the highest level for the yield since Nov. 1, 2007, based on 3 p.m. levels, according to Dow Jones Market Data.
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The yield on the 10-year Treasury
TMUBMUSD10Y,
3.426%
rose to 3.439%, a level close to the 3.422% seen late Tuesday. But the prior-session climb of 6.1 basis points marked the biggest one-day jump since Sept. 6, and highest yield level since June 14.
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The yield on the 30-year Treasury TMUBMUSD30Y, 3.511% rose to 3.515% from 3.506% on Tuesday.
What’s driving markets?
Investors and traders were still trying to absorb Tuesday’s surprising August CPI, which rose to a monthly rate of 0.1% versus the 0.1% decline that was expected by economists. The headline annual rate also came in higher than expected at 8.3%, and even more troubling was a doubling of monthly core inflation, which strips out energy and food costs.
Read: U.S. inflation slows again due to cheaper gas, CPI shows. But prices still high for almost everything else
However, data released on Wednesday showed the cost of wholesale goods and services fell by 0.1% in August due to cheaper gas, the second monthly decline in a row. Economists don’t expect the decline in wholesale costs to be sustained though.
Fed funds futures traders are now pricing in a 68% chance that the Federal Reserve lifts its benchmark interest rate by 75 basis points next week, and a 32% chance of a 100 basis-point hike, according to the CME’s FedWatch tool.
What analysts are saying
“Producer prices were relatively muted in August, held down by falling energy prices and otherwise moving essentially as expected,” Will Compernolle, senior economist at FHN Financial, said in a note. “All in all, the August PPI didn’t rise enough to further flare up anxieties from yesterday’s CPI. While a 100bp hike is still a possibility at next week’s FOMC meeting, this report won’t be the guiding factor pushing the Fed in either direction.”
