Treasuries Show Significant Downturn As Traders Digest Powell Speech

(RTTNews) - After initially moving higher in reaction to a highly anticipated speech by Federal Reserve Chair Jerome Powell, treasuries showed a significant pullback over the course of the trading session on Thursday.

Bond prices pulled back well off their early highs, ending the day firmly in negative territory. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, climbed 5.9 basis points to 0.746 percent after hitting a low of 0.649 percent.

With the notable turnaround on the day, the ten-year yield ended the session at its highest closing level in over two months.

The downturn by treasuries came as traders digested Powell's announcement that the Fed is adopting a "flexible form of average inflation targeting."

Powell stressed in a live-streamed speech to the Jackson Hole economic symposium that the longer-run goal continues to be an inflation rate of 2 percent.

However, the Fed chief noted inflation will average less than that if it runs below 2 percent following economic downturns and never moves above that level even when the economy is strong.

"Households and businesses will come to expect this result, meaning that inflation expectations would tend to move below our inflation goal and pull realized inflation down," Powell said.

He added, "To prevent this outcome and the adverse dynamics that could ensue, our new statement indicates that we will seek to achieve inflation that averages 2 percent over time."

Powell said appropriate monetary policy will therefore likely aim to achieve inflation moderately above 2 percent following periods when inflation has been running below that level.

"In seeking to achieve inflation that averages 2 percent over time, we are not tying ourselves to a particular mathematical formula that defines the average," Powell said. "Thus, our approach could be viewed as a flexible form of average inflation targeting."

Powell stressed the Fed's monetary policy decisions will not be dictated by any formula and said the central bank will not hesitate to act if excessive inflationary pressures were to build.

The announcement from Powell was widely expected but still led to a downturn by treasuries as traders expect the move will lead to higher inflation.

Paul Ashworth, Chief U.S. Economist at Capital Economics, expects the Fed's adoption of average inflation targeting to "trigger additional policy stimulus in the form of stronger forward guidance and possibly additional asset purchases too."

"But, with long-term interest rates already so low and the Fed still ruling out negative rates as undesirable, we don't expect that additional stimulus to provide any significant boost to the real economy," Ashworth said.

On the U.S. economic front, the Labor Department released a report showing a pullback in first-time claims for U.S. unemployment benefits in the week ended August 22nd.

The report said initial jobless claims dropped to 1.006 million, a decrease of 98,000 from the previous week's revised level of 1.104 million.

Economists had expected jobless claims to decline to 1.000 million from the 1.106 million originally reported for the previous week.

A separate report from the Commerce Department showed U.S. economic activity contracted slightly less than initially estimated in the second quarter, although the report still showed a sharp drop in gross domestic product.

Meanwhile, a report from the National Association of Realtors showed a bigger than expected jump in pending home sales in the month of July.

NAR said its pending home sales index spiked by 5.9 percent to 122.1 in July after soaring by 15.8 percent to 115.3 in June. Economists had expected pending home sales to surge up by 3.0 percent.

Pending home sales increased for the third straight month after plummeting in March and April and are now up by 15.5 percent compared to the same month a year ago.

A pending home sale is one in which a contract was signed but not yet closed. Normally, it takes four to six weeks to close a contracted sale.

Trading on Friday may be impacted by reaction to another batch of economic data, including reports on personal income and spending, consumer sentiment and Chicago-area business activity.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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