Treasury Yields Dip After Weak Inflation Data Suggests Slower Pace of Rate Hikes
U.S. Treasury yields declined on Friday, pressured by safe-haven buying fueled by the steep stock market plunge and weaker-than-expected inflation data.
Stocks were depressed all session, led by weakness in the technology sector in reaction to earnings misses by Amazon and Alphabet (Google’s parent). The steep drop in equity prices led investors to seek shelter in U.S. Treasurys, driving down yields in the process. Yields were pushed down further after the Federal Reserve’s preferred inflation metric fell short of expectations in the government’s first estimate of third-quarter economic activity.
At the end of the session, the yield on the benchmark 10-year U.S. Treasury note fell to 3.079 percent, while the yield on the 30-year Treasury bond dropped to 3.315 percent.
Setting aside the decline in the stock market, the inflation numbers were a key driver of rates on Friday. The 1.6 PCE reading puts inflation back below the Fed’s 2-percent goal which means it may alter its plans to raise rates in December or as many as three times in 2019. Some analysts are saying the Fed rate hikes may become more gradual. Instead of raising rates once a quarter, it may now decide to raise rates once every three meeting.
The U.S. Dollar settled lower against a basket of currencies on Friday after hitting a two-month high earlier in the session. A reversal to the upside by the Euro helped drive the greenback from its high, but the real reason for the sell-off was the weaker-than-expected inflation data.
The 1.6 PCE reading, which came in below expectations, raised doubts about the aggressiveness of the Fed when it comes to future rate hikes. Less aggressive rate hikes should make the U.S. Dollar a less attractive investment.
The dollar was also pressured by safe haven buying into the Japanese Yen and Swiss Franc in reaction to the steep plunge in stocks. The Euro also reversed to the upside after nearing its lowest level since August 15. The single-currency was under pressure all week on pessimism about Italian budget talks – and fear of contagion across the Euro Zone.
Gold prices hit their highest level since July 17 on Friday on safe-haven buying related to the stock market’s steep losses. The safe-haven asset closed higher for the fourth straight week. A reversal to the downside in the U.S. Dollar also helped increase demand for dollar-denominated gold as well as lower Treasury yields.
Crude oil prices finished higher on Friday as investors shifted their focus back to the traditional fundamentals while ignoring the plunge in equity markets. Nevertheless, the markets still ended lower for a third straight week. The markets were supported by expectations that the sanctions on Iran would tighten supplies, but the weakness in the stock market and lingering concerns over the U.S.-China trade dispute raised questions about future demand.