U.S. Rates Fall while Markets Look Ahead to March ECB Meeting

Rates fall despite strong data, hawkish commentary from Fed Governor. Treasury yields fell across the curve today, with the 2-year and 10-year yields falling ~3bps to 4.78% and 3.91%, respectively. The move came despite higher-than-expected durables goods orders (excluding transportation) and pending home sales, with the former coming in at 0.7%, significantly higher than the 0.1% forecast. Elsewhere, Fed Governor Philip Jefferson backed the 2% inflation target and suggested that inflation may come down slowly due to the “ongoing imbalance between the supply and demand for labor, combined with the large share of labor costs in the services sector.”

ECB expected to continue hiking as core inflation persists. ECB Governing Council member Vujcic said that the ECB will need to continue hiking as price-pressures continue, similar to the opinion of Fed speakers on U.S. central bank policy in 2023. Markets are currently pricing in a 50bp ECB hike in March, and although this week’s inflation data is expected to show lower headline inflation, core inflation is expected to remain strong. President Lagarde sent the same message yesterday, when she stated that “There’s every reason to believe that we’ll do another 50bps in March”. Looking forward, some traders made bets today that Eurozone hiking will last until 2024, with the ECB deposit rate peaking at 3.9%. 

Day ahead. Retail and wholesale inventories will be released at 8:30 AM ET in a data-heavy session. Chicago PMI and CB consumer confidence will follow later in the morning. There is no Fed commentary on the schedule.