Treasuries surged significantly on Wednesday as traders responded to a key report on consumer price inflation. Despite pulling back slightly following the Federal Reserve's monetary policy announcement, bond prices remained strongly positive. Consequently, the yield on the benchmark ten-year note, which inversely correlates with its price, dropped by 10.9 basis points to 4.295 percent.
The ten-year yield recorded its lowest intraday level in over two months before recovering slightly to close above last Thursday's two-month low.
Early in the session, Treasuries spiked following a Labor Department report that revealed U.S. consumer prices were unexpectedly flat in May. According to the report, the consumer price index remained unchanged in May, following a 0.3 percent rise in April. Economists had predicted a 0.1 percent increase.
This unchanged figure was partly due to a significant 3.5 percent drop in gasoline prices, which counterbalanced the ongoing rise in shelter costs. When excluding food and energy prices, core consumer prices increased by 0.2 percent in May, after a 0.3 percent rise in April, which was in line with expectations.
The report also indicated that the annual rate of consumer price growth decelerated to 3.3 percent in May from 3.4 percent in April, contrary to economists' expectations of no change. Similarly, the annual growth rate of core consumer prices slowed to 3.4 percent in May from 3.6 percent in April, while a decline to 3.5 percent had been anticipated.
These slower-than-expected annual growth rates rekindled optimism about the future interest rate trajectory ahead of the Fed's policy statement. However, while the Fed's decision to keep interest rates unchanged was widely anticipated, the announcement that only one rate cut is expected this year came as a surprise.
In line with its goals of maximum employment and stable inflation at 2 percent over the long term, the Fed decided to maintain the federal funds rate target range at 5.25 to 5.50 percent. The Fed acknowledged modest progress towards its inflation objectives but emphasized the need for "greater confidence" that inflation is moving steadily towards the target before considering rate cuts.
This cautious stance was evident in the Fed officials' revised interest rate forecasts. The latest projections indicate that rates are expected to range between 5.0 and 5.25 percent by the end of 2024, suggesting a single rate cut this year, down from the three previously forecasted in March.
However, the accompanying dot plot highlighted a significant divergence of opinions among Fed officials regarding this year's rate outlook. According to Chris Low, Chief Economist at FHN Financial, "More participants expect to cut twice than once, but no one expects more than two cuts, while four don't foresee any cut this year."
Trading activity on Thursday is likely to remain influenced by reactions to the Fed's announcement, with additional focus on reports concerning producer prices and weekly jobless claims.
