U.S. Treasury Curve Continues Its Return to Normalcy

Yield curve steepens. Longer term U.S. Treasury yields rose throughout the day following strong GDP and quarterly inflation data and as markets continued to digest yesterday’s Fed meeting, while shorter term rates ended the day slightly lower. The 10-year yield closed ~5 bps higher at ~4.56%, while the 2-year yield fell ~4 bps to ~4.31%. The yield curve is now at its steepest level since 2022, as markets price in expectations for continued inflation and strong economic growth over the longer-term. Equities fluctuated throughout the day, ultimately ending the day slightly lower with the S&P 500 and NASDAQ down ~0.09% and ~0.10%, respectively.

Quarterly data highlights growth and inflation. Third quarter GDP growth estimates were revised from 2.8% to 3.1%, above expectations of no-change. The increase was largely driven by upward revisions to consumer spending, which notched its fastest growth since early 2023, and higher exports. Additionally, third quarter core PCE growth was upwardly revised from 2.1% to 2.2% vs. expectations of no revision, ahead of tomorrow’s broader PCE data release. Overall, the results are another sign of continued growth and inflation, lending credence to the hawkish signals sent by the Fed yesterday.

Inflation climbs in Japan. Consumer prices excluding fresh food climbed 2.7% in November per Japanese government data released today, higher than 2.6% estimates and October’s 2.3% advance, largely driven by lower government energy subsidies. Inflation has remained above the Bank of Japan’s 2% target for over two-years now, however the central bank left their policy rate unchanged yesterday. After the meeting, Governor Ueda said the pace of rate hikes has been gradual because inflation and inflation expectations have been slow to rise, and he offered little insight into the road ahead.