US government bonds rally after disappointing GDP data

U.S. government debt rallied on Thursday after data showing the U.S. economy contracted in the second quarter prompted traders to lower expectations for Federal Reserve rate hikes.

The yield on the two-year Treasury note, which is sensitive to monetary policy expectations, fell 0.12 percentage points to 2.88% as the price of debt jumped.

The 10-year Treasury yield, which moves with growth and inflation expectations, hit its lowest level since April after the report, and was trading down 0.11 percentage points to 2.68% at the end of the day.

The decline in yields came after a Commerce Department report showed the world’s largest economy contracted at an annualized rate of 0.9% in the second quarter of this year, worse than expectations. an increase of 0.5%.

Gross domestic product fell 1.6% in the first three months of the year.

Two consecutive months of contraction meets the technical definition of a recession, although a separate body, the National Bureau of Economic Research, does not intervene until much later to determine whether the economic cycle has officially turned at the start of this year. .

The White House and the Fed have said they do not believe the United States is currently in a recession, a claim supported by continued strength in the labor market, where the unemployment rate remains at an all-time low of 3.6. %.

While the headline GDP figure fell, personal consumption, which provides insight into the strength of the US consumer, rose 1% in the second quarter, albeit at a slower pace than in the first.

What the report showed was that consumers were still spending, businesses were still hiring, so we don’t think the economy is in a recession, even if it’s going downhill as the Fed rapidly tightens policy, Lydia said. Boussour, chief US economist at Oxford Economics.

U.S. stocks rose, extending gains that began on Wednesday after the Fed raised its main interest rate by 0.75 percentage points for the second straight month. Stocks rallied as markets focused on comments from Chairman Jay Powell, who said the central bank was open to the possibility of small increases going forward.

The blue-chip S&P 500 ended the day up 1.2%. The tech-heavy Nasdaq Composite gained 1.1% after earlier losses.

At some point, it will be appropriate to slow down… We could make another unusually large increase [in September], but it is not at all a decision that we have made. Were going to be data-driven, Powell said.

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Traders and strategists said Powell’s suggestion that monetary policy decisions would depend on the data pointed to a lower likelihood of big rate hikes going forward.

This implies less dramatic increases over the next three [Fed] meetings than in the past two, said Tai Hui, market strategist at JPMorgan Asset Management, adding that recent readings on inflation and labor market dynamics…currently signal the need for a more cautious approach to next year.

Thursday’s disappointing data further dented Fed rate hike expectations for the rest of this year. Fed funds futures signaled that the main central bank interest rate would average 3.26% in December, down from estimates of 3.32% a day earlier. Estimates had hit 3.69% just two weeks ago before a string of weak data led market participants to expect more dovish policy from the central bank.

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