Treasury yields tick higher ahead of Fed’s favorite inflation gauge and a measure of labor costs

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Treasury yields nudged higher Friday as investors awaited the release of a closely watched US inflation gauge as well as an important measure of first-quarter labor costs.

What are yields doing?
What’s driving the market?
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The March personal consumption expenditures index is due at 8:30 am Eastern. Economists surveyed by The Wall Street Journal expect the core PCE price index, the Federal Reserve’s preferred inflation gauge, to show a 0.3% monthly rise after a 0.4% increase in February. Year over year, the index is expected to slow to 5.3% versus 5.4% in February, remaining well above the Fed’s 2% target.

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The first-quarter Employment Cost Index is also due at 8:30 am and will provide a look at labor costs amid a tight jobs market that is seen helping to fuel inflation pressures. Fed chair Powell in December said a jump in the third-quarter ECI rattled policy makers.

The ECI later slowed a bit, showing a 1% quarterly rise in the final three months of 2021. Economists expect the first-quarter ECI to rise to 1.1%.

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Treasury yields have moved up sharply in 2022 as inflation has continued to run hot, with the consumer price index hitting a level last seen more than four decades ago. The Fed, which delivered a quarter percentage point interest rate increase in March, is expected to deliver a rare half-point hike to the fed-funds rate when policy makers meet next week. And investors have penciled in the possibility of more outsize rate increases to come, along with expectations for an aggressive wind-down of the central bank’s balance sheet.

Fed’s half-percentage-point interest rate hike next week seen baked in the cake

Investors will also weigh March data on personal income and spending.

Other data on tap include a final April reading of the University of Michigan’s consumer sentiment index, including a measure of consumer expectations for inflation over the next five years.

What do analysts say?

“A sustained moderation in wage growth would pull down everyone’s inflation forecasts,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, referring to the ECI reading, in a note.

“The rate of growth of unit labor costs — wage growth less productivity growth — is the biggest single driver of US core inflation in the medium-term,” he wrote. “That’s why Chair Powell admitted candidly in December that the surge in the third quarter ECI scared policymakers.”


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