Markets Turn to Next Week’s FOMC Meeting

Yields close nearly flat. Today’s session was relatively quiet as yields traded within a 4 bp range across the curve, reaching intraday highs in the morning ahead of a small decline in the afternoon. The 2-year yield closed 1 bp higher at 3.92% while the 10-year yield declined 1 bp to 4.39%. Markets are largely looking ahead to next week’s FOMC decision, PCE, and labor market data. Fed Funds futures have a 25 bp rate cut priced in as ~3% likely at next week’s meeting, and a move is not fully priced in until October.

Durable goods orders plummet in June. Durable goods orders fell 9.3% MoM in June, slightly less than the 10.7% expected decline, logging the sharpest pullback since the start of the Covid pandemic. The decline follows May’s 16.5% rise (the highest increase in over a decade) driven by elevated Boeing orders. Excluding aircraft and military goods, June’s figures were well below expectations. Core capital goods were down 0.7% MoM against expectations of a 0.1% increase and vs. last month’s 2% jump. This decline is likely due to continued trade policy uncertainty as deal negotiations between the U.S. and other trade partners remain fluid.

BOJ rate hike odds rise following U.S. trade deal. The BOJ appears closer to resuming rate hikes after the U.S. finalized its 15% tariff on Japanese imports. BOJ Deputy Governor Shinichi Uchida said that the agreement was a “major breakthrough” and noted “uncertainty has receded, and this of course means that the likelihood has risen” for BOJ economic forecasts to be met. That increased clarity should allow for additional rate hikes, and swap traders are currently pricing in an 80% chance of another hike by year-end versus 60% prior to the deal announcement.