Short-term U.S. government debt rose on Thursday after data showing the U.S. economy unexpectedly shrank in the second quarter prompted traders to cut expectations for a rate hike by the Federal Reserve.
The yield on the two-year Treasury bond, which is sensitive to expectations of monetary policy, edged down 0.1 percentage point to 2.86 percent as the cost of debt jumped.
The drop in yields came after a report from the US Bureau of Economic Analysis showed the world’s largest economy shrank 0.9 percent year-on-year in the second quarter of this year, much worse than expectations for growth of 0.5 percent.
The unexpected drop came after gross domestic product shrank 1.6% in the first three months of the year.
Two consecutive months of contraction meet the technical definition of a recession, although a separate body called the National Bureau of Economic Research won’t weigh in until much later to determine whether the economic cycle officially turned at the start of this year.
After opening the day higher, the blue-chip S&P 500 index reversed course to fall 0.7%. The tech Nasdaq Composite fell 1% after Facebook owner Meta reported its first annual quarterly revenue decline, sending shares down 8%.
The GDP report comes a day after the Fed raised its key interest rate by 0.75 percentage points for the second straight month. However, markets focused on comments from Chairman Jay Powell, who said the central bank was open to the possibility of smaller increases in the future.
“At some point it will be appropriate to slow down. . . We may make another unusually large increase [in September]but that’s not a decision we’ve made at all, we’re going to be driven by the data,” Powell said.
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Traders and strategists said Powell’s suggestion that monetary policy decisions would depend on data indicated a lower likelihood of big rate hikes in the future.
“This suggests 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 in the year ahead.”
Disappointing data on Thursday further lowered expectations for Fed rate hikes for the rest of this year, with federal funds futures signaling the central bank’s key rate would average 3.2% in December from forecasts of 3.265% the day before. – early.
Expectations rose to 3.605 percent just two weeks ago, before a series of weak data led market participants to expect more dovish policy from the central bank.
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