Treasury yields edge lower despite US inflation higher than expected

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US Treasury yields and the dollar edged lower on Wednesday, as investors shrugged off figures showing that US inflation last month was higher than expected.

Yields on the interest rate-sensitive two-year US Treasuries fell to 5.01 per cent after the announcement, from 5.04 per cent ahead of the consumer price data. Bond yields fall when prices rise.

The dollar gave up earlier gains to trade flat on the day against a basket of six peer currencies.

US consumer prices climbed at an annual rate of 3.7 per cent in August, up from 3.2 per cent in the previous month and marginally above analysts’ forecasts.

Despite the uptick, the overwhelming majority of market participants were still placing their bets on the Federal Reserve keeping interest rates steady at its policy meeting next week. Core inflation fell from 4.7 per cent to 4.3 per cent over the same period.

“August’s rise in the US inflation rate is unlikely to prompt the Fed into raising interest rates further this month,” said Richard Garland, chief investment strategist at Omnis Investments. “The main impact on the headline inflation rate comes from rising energy prices but the Fed is likely to look through this given core inflation remains subdued and inflation expectations have been falling.”

Wall Street’s benchmark S&P 500 and the tech-focused Nasdaq Composite were up 0.2 per cent at the New York open, in a muted reaction to the figures.

An increase in the headline figure was expected as oil prices have climbed since June after oil exporters Saudi Arabia and Russia announced a series of supply cuts in an effort to prop up prices.

International benchmark Brent crude was 0.2 per cent higher at $92.21 a barrel on Wednesday, hitting a fresh 10-month high. The US equivalent West Texas Intermediate rose 0.1 per cent to $88.94.

Recent pressure on prices, however, has prompted traders to tip their bets in favour of another rate increase by the European Central Bank, which is due to announce its policy decision on Thursday. Swaps markets are now placing a 66 per cent probability that the central bank will increase eurozone interest rates by 0.25 percentage points to 4 per cent this week.

If “the ECB does decide to hike tomorrow, they are more likely to indicate a willingness to pause thereafter, keeping the impact on the terminal rate fairly limited”, said Jason Davis, global rates portfolio manager at JPMorgan Asset Management.

Europe’s region-wide Stoxx 600 gave up 0.4 per cent, extending losses from the previous session, while France’s Cac 40 declined 0.3 per cent and Germany’s Dax fell 0.4 per cent.

Yields on the policy-sensitive two-year German Bund rose 0.05 percentage points to 3.16 per cent, while yields on the 10-year Bund, a regional benchmark in Europe, advanced 0.03 percentage points to 2.68 per cent.

Asian markets edged lower on Wednesday, with China’s benchmark CSI 300 down 0.6 per cent while Hong Kong’s Hang Seng and Japan’s Topix gave up 0.1 per cent.

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