Yields fall on dovish Fed comments. Treasury yields declined today following comments from Fed Governor Waller this morning, where he indicated that he would be in favor of holding rates steady if inflation data continues to trend in the right direction. The 2-year yield closed 3 bps lower at 4.34%, while the 10-year yield closed 1bp lower at 4.77%. Meanwhile, equities rallied as September rate hike expectations faded to ~50% likely, with the S&P 500 and NASDAQ closing 1.06% and 1.40% higher, respectively.
Waller’s dovish tone hinges on inflation data. Fed Governor Christopher Waller said today that he is willing to hold interest rates at the current 3.50%-3.75% target. He stated that, “If there is continued progress toward our 2% goal, then I am willing to support holding the policy rate at its current level.” He did caveat that “If inflation comes in hot, I would consider a rate hike.” Prior to Waller’s comments the market was pricing in a 63% chance of a rate hike, which has since dropped to 51%. Matthew Luzzetti, chief economist at Deutche Bank, added that “Almost all officials now are suggesting that they could be open to raising rates at the September meeting, but some officials probably have higher bars on what the data need to show.”
ISM services data point to continued expansion. The ISM Services index posted a headline reading of 55.4 in August, above expectations of 54.1 and the highest level in six months. Twelve sectors reported growth, including real estate and accommodation and food services, while five contracted. New orders grew at the fastest pace in nearly four years, coming in at 60.9 versus 57.2 in the prior period. The prices paid index came in at 72.6, above forecasts of 70.0 and July’s 70.3, marking the highest level since mid-2022. Steve Miller, chair of the ISM Services Business Survey Committee, noted that “petroleum-related products, diesel, and gasoline were again reported as up in price in August.” Sticky inflation may be tied to businesses layoffs, as the employment gauge has contracted in five of the last six months.
