US Yield Curve Hits its Steepest Level Since 2022

Yield curve steepens as markets bet on imminent rate cuts. The 2-year Treasury yield declined over 6bps today to 4.43% while the long-end of the curve rose 3-6bps, a sign that markets expect the Fed to cut rates sooner than expected. The differential between 2-year and 10-year yields is now ~15bps, the steepest level since the summer of 2022. Some of the move was driven by former NY Fed President Dudley, who argued that the Fed should cut rates at next week’s FOMC meeting. An unexpected contraction in US manufacturing PMI also contributed, with all eyes now geared toward GDP and PCE data (set for release on Thursday and Friday, respectively).

Bank of Canada cuts rates for the second consecutive meeting. The Bank of Canada (BOC) cut their policy rate by 25bps to 4.50% today and signaled that additional cuts are forthcoming. The bank offered a dovish tone, as BOC Governor Macklem warned that “downside risks are taking on increased weight in our monetary policy deliberations” while inflation continues to make “progress” to the 2% target. The BOC stated that the rate cut timeline is not “predetermined” and will remain dependent on incoming data.

U.S. service sector activity surges while manufacturing contracts in July. S&P PMI data released today showed that U.S. business activity expanded at the fastest pace since April 2022. The overall index was 55, above expectations of a 54.2 result, driven by strong service sector growth. The services index was 56, the highest since March 2022. On the other hand, the manufacturing sector fell into contraction territory at 49.5. Commenting on the results, S&P chief business economist Chris Williamson said, “From the output perspective, growth has become worryingly skewed, with manufacturing slipping back into contraction as the service sector gains further strength.”