Bond Yields Drop on Waller’s Call, Inflation Views: Markets Wrap

Canada's Finance Minister François-Philippe Champagne signaled that any trade deal with the US is likely to include at least some tariffs, saying, "there's not evidence to suggest that you can have a trade deal with the US without tariffs." Champagne spoke Thursday with Bloomberg's Oliver Crook. Bloomberg

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(Bloomberg) — Bond yields fell alongside the dollar as Federal Reserve Governor Christopher Waller reiterated his case for a July rate cut, while data showed an improvement in consumer expectations for inflation. Stocks fluctuated as traders parsed a handful of earnings.

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Short-dated Treasuries led gains after Waller hinted he would dissent if his colleagues vote to hold rates steady in July. Bonds also rose as University of Michigan data showed consumers expect prices to increase at an annual rate of 4.4% over the next year, down from 5% in the prior month. The S&P 500 was little changed after a rally to all-time highs.

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“Investors have something to cheer about with signs of improved inflation expectations,” said Jeff Roach at LPL Financial. “According to this report, the trajectory looks encouraging.”

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Meantime, Waller said he sees no sign that inflation expectations are on the rise, which allows the Fed to move forward with rate cuts. He also restated the case the Fed should cut when policymakers gather later this month, given data suggesting the US labor market is “on the edge.”

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“We think he is correct. The Fed’s role is to think ahead, not look behind, which is what Waller is doing concerning the slowing employment situation,” said Andrew Brenner at NatAlliance Securities. “Nonetheless a July cut won’t happen.”

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Money markets still assign near-zero odds of a cut on July 30. They price in about 45 basis points of easing by year-end, down from more than 65 basis points at the start of the month. Most of the shift occurred in response to stronger-than-anticipated June employment data released July 3.

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US consumer sentiment rose to a five-month high in early July as expectations about the economy continued to improve. The preliminary July sentiment index rose to 61.8 from 60.7 a month earlier, according to University of Michigan data released Friday.

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The report offered further relief after data this week showed US retail sales rebounded in June in a broad advance, tempering some concerns about a retrenchment in consumer spending.

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To Mark Hackett at Nationwide, macroeconomic data remains broadly supportive, and the recent strength in markets has been impressive, though perhaps even more noteworthy is the prevailing sense of calm amid a busy and often volatile news cycle. 

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“Investors have responded positively to robust economic indicators and earnings reports that highlight continued resilience in US consumer spending,” he said. “The rest of earnings season will be a key test given elevated valuations and expectations, though with current momentum and sentiment, the path of least resistance is higher.”

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At Wolfe Research, Chris Senyek says economic data releases this week have been consistent with his view that the US economy is coming in better than consensus expects.