- The US ISM manufacturing PMI fell from 48.5 in June to an 8-month low of 46.8 in July.
- US unemployment claims rose to an 11-month high of 249,000.
- Treasury yields plunged after reports of the killing of a Hamas leader in Iran.
Interest futures soared on Thursday and Friday as Treasury yields fell after poor US economic data. At the same time, geopolitical tensions led to a scramble for safe assets and boosted prices.
The US ISM manufacturing PMI fell from 48.5 in June to an 8-month low of 46.8 in July. The sharp decline in business activity indicates weakness in a sector that accounts for over 10% of the US economy. As a result, investors were worried about a faster-than-expected economic decline.
Meanwhile, separate data showed a surge in US unemployment claims. These claims rose to an 11-month high of 249,000, beating forecasts for 236,000. The Fed closely monitors the labor market, which has shown signs of weakness. Notably, the unemployment rate reached an over 2-year high of 4.1% in June. A decline in the labor market would put more pressure on the US central bank to cut rates. Moreover, it could lead to an increase in the size of rate cuts.
On Wednesday, the US ADP report showed a slower-than-expected job increase in July. Private employment increased by 122,000 compared to expectations of a 150,000 increase.
Furthermore, the US will release the major nonfarm payrolls report. Economists expect an additional 175,000 jobs in July, a drop from 206,000 in June. Slower job growth could increase expectations for a 50-bps cut at the September meeting. Meanwhile, the unemployment rate will likely hold at 4.1%.
Fed rate cut expectations (Source: Bloomberg World Interest Rate Probabilities)
If data continues showing a faster-than-expected decrease in demand, yields will plunge, and interest futures will rally. The Fed recently assumed a more dovish tone and opened the door to a rate cut in September. Powell has acknowledged in many of his speeches that inflation is progressing well. Therefore, policymakers are more confident about attaining the 2% target. As a result, investors have increased bets for a 50-bps cut in September to 27.5%.
Elsewhere, the bond market rallied after reports of the killing of a Hamas leader in Iran. The incident raised fears of an escalation in the Gaza war. Additionally, it could lead to further delays in the ceasefire talks between Israel and Hamas. As a result, investors dumped risky assets like stocks and bought safer assets like bonds and the dollar.
