U.S. Treasury yields experienced a notable uptick on Thursday, marking a departure from three-week lows, spurred by an unexpectedly positive manufacturing report for April. This report highlighted the ongoing pressures of tariffs on imported goods, which continue to disrupt supply chains and keep input prices elevated. The Institute for Supply Management (ISM) revealed that the manufacturing Purchasing Managers’ Index (PMI) dipped to 48.7—a five-month low—but still surpassed economists’ expectations of a drop to 48.0.

Manufacturing Report Insights

• The ISM’s latest report indicates that manufacturers are facing increased costs, with the prices paid for inputs climbing to 69.8, the highest since June 2022.
• Brian Jacobsen, chief economist at Annex Wealth Management, commented, “While the ISM Manufacturing index is better than anticipated, it still reflects a concerning trend. The decline in production and new export orders alongside rising domestic orders suggests that while costs are increasing, overall activity is declining.”

Market Reactions

Traders are navigating the potential economic consequences of tariffs implemented during President Trump’s administration. These tariffs could hinder growth while simultaneously driving inflation, which might delay the Federal Reserve’s plans for interest rate reductions.

Will Compernolle, a macro strategist at FHN Financial, noted, “The Federal Open Market Committee (FOMC) is likely to prioritize inflation expectations, particularly when faced with lower growth alongside persistent inflation.”

Rate Cut Expectations

According to the CME Group’s FedWatch Tool, traders are currently assigning a 58% probability to a rate cut in June, a decrease from 68% earlier on Thursday. Meanwhile, the likelihood of a rate reduction during the Fed’s meeting on May 6-7 remains at a mere 5%.

Additionally, the latest jobless claims data revealed an unexpected rise in the number of Americans filing for unemployment benefits last week, contributing to a more cautious market sentiment. The upcoming employment report for April is projected to show the addition of 130,000 jobs, while the unemployment rate is expected to remain steady at 4.2%.

Labor Market Resilience

Despite the fluctuations in jobless claims, the labor market has shown resilience, allowing the Federal Reserve to maintain current interest rates. Analysts are closely monitoring the situation, particularly in light of ongoing concerns about inflation.

Yields initially surged last month following Trump’s announcement of significant tariffs on trading partners but have since receded after he signaled a 90-day pause on most tariff increases. Market participants are now keenly observing the potential trade agreements between the U.S. and its partners, as well as the anticipated economic impact of these tariffs.

Current Yield Trends

As of the latest reports, the yield on the benchmark 10-year U.S. Treasury notes rose 5.6 basis points to 4.231%, after dipping to 4.124%, the lowest level since April 7. The yield on the two-year note, which typically aligns with interest rate expectations, climbed 8.4 basis points to 3.705%, following a drop to 3.558%, also the lowest since early April.

In summary, while the manufacturing sector shows signs of strain, the broader economic landscape remains complex, with traders and analysts keenly awaiting further developments in trade negotiations and their potential impacts on inflation and interest rates.