Bond yields experienced a modest decline early on Tuesday as investors awaited key inflation data and remarks from Federal Reserve Chair Jerome Powell.
The yield on the 2-year Treasury slid by 2.1 basis points to 4.855%, while the 10-year Treasury yield dropped by less than 1 basis point to 4.484%. Similarly, the 30-year Treasury yield eased by 1.4 basis points to 4.263%.
These movements were relatively subdued for a second consecutive day, indicating investor caution ahead of the upcoming release of the consumer price index (CPI) report for April.
Market sentiment is likely to be influenced by the CPI figures, particularly if they exceed expectations for the fourth consecutive month. A higher-than-expected CPI could lead to a further postponement of a Federal Reserve rate cut, whereas a cooler CPI could bring the possibility of a rate cut in September back into consideration. Prior to the CPI report, traders will focus on the April producer price index (PPI), which is anticipated to increase by 0.3% compared to the previous month's 0.2%. The core PPI, excluding volatile items like energy and food, is expected to have risen by 0.2%, consistent with the previous month.
In addition to the economic data, investors are anticipating impactful comments from Powell, who is scheduled to speak at a banking event in the Netherlands at 10 a.m. Eastern time. Fed Governor Lisa Cook is also set to speak at 9:10 a.m. on the topics of community development and financial institutions.
Current market expectations suggest a 96.5% and 74.6% probability that the Fed will maintain interest rates within the range of 5.25% to 5.50% after its upcoming meetings on June 12th and July 31st, respectively, according to the CME FedWatch tool. Analysts at Deutsche Bank anticipate that the headline PPI will slightly exceed consensus, with a monthly pace of plus 0.4%.
Jim Reid of Deutsche Bank emphasized the significance of specific PPI components such as health care services, portfolio management, and domestic airfares, which contribute to the core PCE deflator, the Fed's preferred inflation gauge. Reid underscored that economists would closely monitor these categories.