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Markets Prepare for FOMC as Data Pushes Yields Lower

After a move higher early in the week, Treasury yields gave back those gains and more, ending the week lower by 2-4 bps.  The declines were triggered by Tuesday's CPI inflation data (which showed smaller price increases than expected) and weak manufacturing and industrial production data on Friday. 

Even as consumer income and spending remain robust, both the Federal Reserve and market participants see little reason to further tighten monetary policy.  Next week's FOMC meeting is expected to result in no movement in Fed funds and a lower forecast for future rates from FOMC members.  Market participants expect the Fed to remain on the sidelines even further, as futures place a 2 in 3 likelihood that Fed funds ends the year where it started. 

Additionally, there are increasing odds that the FOMC will cut rates by year-end due to an economic slowdown.  Those probabilities have increased in line with the release of sluggish economic data as indicated above.

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