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Investment Forecast: U.S. Treasury Yields and Economic Trends

July 21, 2023

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Investment Forecast: U.S. Treasury Yields and Economic Trends

The U.S. economy holds significant sway on global financial markets. As investors, staying informed about its trajectory allows us to make strategic, and profitable, investment decisions.

So, let’s dissect the latest economic indicators. Our investment forecast in this edition of the newsletter will be the recent movement of Treasury yields and the implications for Federal Reserve monetary policy.

Person signing loan agreement next to a calculator and dollar bills.  Investment Forecast
Treasury yields have been decreasing. Photo by Monstera.

Treasury Yields Reflect Economic Sentiment

The ebb and flow of Treasury yields provide valuable insights into the economy’s health. Last Monday, the 10-year Treasury yield slightly decreased to 3.807%, while the 2-year yield dipped marginally by less than one basis point to 4.749%. These movements reflect investors’ anticipations around the economic outlook and monetary policy shifts, especially in a week lacking key economic data reports.

Inflation Pressure Eases: An Economic Update

Last week, economic data from the Bureau of Labor Statistics indicated a slowdown in inflationary pressures. The consumer price index rose just 0.2% compared to the previous month, and 3% on an annual basis, marking the lowest annual inflation rate since March 2021. These figures just slightly undercut economists’ expectations, but not significantly.

Interestingly, wholesale inflation followed suit, increasing less than projected according to the recent producer price index report.

Inflation seems to be slowing down but further rate hikes are forecasted. Photo by Monstera.  Investment Forecast

The Federal Reserve’s Monetary Policy Response

These economic indicators play a critical role in shaping the Federal Reserve’s monetary policy. The central bank’s early 2022 response to inflation was to adopt a tighter monetary policy, leading to 10 interest rate hikes across eleven meetings to temper inflation and stabilize the economy.

The interest rate remained unchanged during the latest policy meeting. However, markets are pricing in a further rate hike from the Fed this month, as policymakers convene this week from July 25-26.

Key Takeaways

  • Treasury yields are very sensitive to investors’ economic outlook and potential monetary policy changes.
  • Recent data points to a slowdown in inflation, with both consumer and wholesale indices falling below economists’ expectations.
  • The Federal Reserve’s monetary policy continues to adjust in response to these changes, with another rate hike expected this month.

By keeping an eye on these variables, investors have a better chance of anticipating the Federal Reserve’s actions and making more informed decisions about their investments in the shifting sands of the U.S. economy.

Learn more from our expert insights here.

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