Treasury yields fall as Fed speakers suggest skipping rate hike in June

By Isabel Wang and Jamie Chisholm

Treasury yields fell on Wednesday after two Federal Reserve officials suggested that the central bank could skip an interest-rate increase at its June policy meeting, while traders awaited a House vote on the debt-ceiling deal negotiated by Speaker Kevin McCarthy and President Joe Biden to prevent a potential default.

What happened

What drove markets

U.S. treasury yields declined on Wednesday after Federal Reserve officials signaled they were inclined to keep the policy interest rate steady at the next meeting in June, allowing policymakers to see more economic data before making decisions about the extent of additional monetary tightening.

"I am in the camp increasingly coming into this meeting thinking that we really should skip, not pause, but skip an increase," Philadelphia Fed President Patrick Harker said on Wednesday.

Meanwhile, Fed Gov. Philip Jefferson on Wednesday said that even if the central bank opts to skip another increase in interest rates in June, it would not necessarily mean it is done for the year.

"A decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle," Jefferson said in a speech in Washington. D.C.

Markets priced in a 27.5% probability that the Fed will raise interest rates by 25 basis points to 5.25% to 5.50% after its meeting on June 14, down from 70% Wednesday morning, according to the CME FedWatch tool.

In U.S. economic data, the Chicago Business Barometer, also known as the Chicago PMI, fell 8.2 index points to 40.4 in May, according to MNI Indicators. Economists polled by The Wall Street Journal forecast a 47.3 reading. This is the ninth straight reading below the 50 threshold that indicates contraction territory.

Meanwhile, job openings in the U.S. climbed in April to a three-month high of 10.1 million, another sign the economy hasn't cooled enough to forestall more interest-rate increases by the Federal Reserve. Economists polled by The Wall Street Journal had forecast job listings to total 9.5 million.

Traders also closely watched the debt-ceiling House vote in Washington, which is expected to take place around 8:30 p.m. ET Wednesday.

Elsewhere, soft economic data from China on Wednesday revived global economic growth concerns and encouraged buying of government bonds, also pushing U.S. Treasury yields lower.

Purchasing managers surveys showed manufacturing in the world's second biggest economy contracted in May and the service sector expanding at its slowest pace in four months.

What analysts said

Deutsche Bank economists noted recent comments by Cleveland Fed President Loretta Mester and Fed Gov. Christopher Waller that suggested they were not minded to pause rate hikes in June, but felt the central bank would nevertheless stand pat.

"At the moment, our baseline is that the Fed remains on hold at the June meeting, but there are clear risks of at least one more hike over the next two meetings.," said the Deutsche team led by Amy Yang, a research analyst.

"[M]arket measures of long-run inflation expectations have been on the rise recently, especially relative to fundamental drivers like oil prices...Up to today, we have 6 officials -- 4 are voters -- appearing to favor more hikes (Bowman, Logan, Waller, Kashkari, Bullard, Mester), while 5 officials -- 3 are voters -- leaned towards pausing (Powell, Goolsbee, Jefferson, Collins, Bostic). Three officials (Williams, Barkin, Daly) are open to both options and the other 3 voters (Harker, Barr, Cook) have yet to comment since the May meeting," said Yang and her team.

This distribution of voters could make the June meeting outcome "extremely sensitive to the May payroll and CPI inflation data" to be released over the next two weeks, they wrote.

-Isabel Wang

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05-31-23 1612ET

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