Treasury yields hold steady as soft China data underscores global risks

With China’s factory-gate prices already deep in deflationary territory, the prospect of reduced demand means the world’s second-biggest economy may help reduce goods inflation in developed nations, potentially assisting central banks in their battles against consumer-price pressures.

However, China’s data is also raising worries about growth prospects for the U.S., with the eurozone having slipped into a recession earlier this year. In an interview Monday with Bloomberg Television, Treasury Secretary Janet Yellen said she does not expect the U.S. economy to fall into a downturn.

In U.S. economic releases on Monday, the New York Fed’s business conditions index, a gauge of manufacturing activity in the state, fell 5.5 points in July to 1.1.

Markets were pricing in a 96.1% probability that the Fed will raise interest rates by 25 basis points to a range of 5.25%-5.50% on July 26, according to the CME FedWatch Tool. The chance of a similar or bigger move by November is seen at 29.5%.

The central bank is expected to take its fed funds rate target back down to around 5% or lower next year.

What analysts are saying

“The market is debating whether the U.S. economy will slow — we provide evidence that U.S. activity has already slowed,” said Steve Englander, head of global G-10 FX research and North America macro strategy at Standard Chartered Bank’s New York branch. “Data from the income side are much weaker than standard GDP calculations based on demand …. as was the case in the runups to the 1990 and 2008 recessions.”

“We also look at daily data on withholding taxes and UI benefits that point to a weaker labor market than NFP [nonfarm payrolls],” Englander wrote in a note. “Not a big ‘R’ recession to set your hair on fire, but looks like there is sluggishness in the air. This will drive USD [the dollar] and yields further lower.”