For the US bond market, data is more important than the guidance of the Federal Reserve

According to Zhitong Finance APP, the U.S. bond market is making people realize that investors are living in a world where data is much more important than anything the Federal Reserve might say.

Last Wednesday, weaker-than-expected May CPI data in the U.S. triggered one of the largest increases in U.S. Treasury bonds this year. Less than six hours later, after the latest Fed economic forecast showed that there would only be one rate cut this year, the rise in U.S. Treasury bonds slightly weakened.

However, on Thursday, due to the unexpected decrease in May PPI data and the increase in initial jobless claims, indicating that inflation pressures continue to ease, U.S. Treasury bonds rose again. The yield on the benchmark 10-year U.S. Treasury bond closed near 4.2% last Friday, with a cumulative decline of 21 basis points last week, marking the largest weekly drop since mid-December last year.

In short, mild inflation data has drowned out the hawkish voices of the Fed. These changes highlight that the importance of Fed guidance is diminishing at a time when the economy continues to surprise everyone, including Fed policymakers. Fed Chairman Powell also acknowledged this at the press conference after last week's rate decision, stating that the Fed is watching the trend of the data.

This means that as rate prospects are reassessed when key data is released, the bond market may continue to face a rather bumpy road. Jean Boivin, head of investment research at BlackRock, said that policymakers "will speak, but in this environment, the market needs to discount what they say more than usual. In this environment, people are overreacting to upcoming macro data."

A series of data released last week was more favorable to bond investors. The U.S. core CPI rose by 0.2% month-on-month in May, lower than market expectations, which is a welcome change. In addition, while job growth remains strong, other data such as job vacancies, initial jobless claims, and the unemployment rate indicate that the labor market is cooling. These data enhance investors' confidence that the Fed will start cutting rates later this year.

Derivatives trading shows that traders are digesting the expectation that the Fed is very likely to cut rates twice by 25 basis points each this year, with the first rate cut possibly as early as September. This is slightly more aggressive than the forecast provided in the dot plot. The latest dot plot shows that the median forecast of Fed policymakers is for one rate cut this year, lower than the three cuts shown in the dot plot released in March. However, policymakers expect to cut rates four times in 2025, exceeding the previous expectation of three cuts.

However, Powell hinted that investors should be cautious about these forecasts, stating that Fed officials are not "trying to send a strong signal." The Fed's reliance on data does not mean that every economic data point will change its policy trajectory. Although bond prices have been fluctuating, market expectations and the Fed's pace are much more aligned than they were late last year Traders at the time expected the Fed to start cutting interest rates as early as March this year, and they expected the Fed to cut rates six times this year, well beyond the Fed's guidance.

Analysts Ira Jersey and Will Hoffman said that the U.S. economy seems strong enough, and the Fed may not start cutting rates until after the November election, which would keep the U.S. bond yield curve inverted before the rate cut. Analysts said that despite the economy running well above trend levels, with inflation hovering above the Fed's 2% target, the Fed's view remains broadly neutral.

Fed officials said they would need several good inflation reports before they have enough confidence to start easing policy. In response, Gargi Chaudhuri, head of investment strategy at BlackRock Americas iShares, said, "They really won't overreact to one or two data points."

Without reliable guidance from the Fed, data observations will bring greater volatility by definition. At the end of last year, after a sharp drop in inflation, U.S. bonds saw a strong rebound, but the rebound sharply reversed in the first four months of 2024. Since then, the market has made a big turn, with the 10-year U.S. bond yield falling by nearly half a percentage point since the end of April.

The market will take a breather this week as there are no significant data releases comparable to the past two weeks of employment and inflation data. Several Fed officials, including board members Lisa Cook and Adriana Kugler, will be speaking this week.

Jerome Schneider, head of short-term investment portfolio management and financing at Pacific Investment Management Company, said, "The market's reaction to a series of discrete data points is a bit excessive at the moment. These positive signals are just beginning to emerge, although the long-term situation remains somewhat uncertain."