- Investors are pricing a 50% chance of another super-sized rate cut in November.
- US jobless claims dropped more than expected last week.
- The US core PCE price index increased by 0.1%, missing estimates of 0.2%.
Interest futures rose on Thursday and Friday as Treasury yields eased amid rising Fed rate cut expectations. However, the move was subdued as market participants waited for the core PCE inflation figures.
Treasury yields eased on Thursday despite upbeat US data. The outlook for Fed rate cuts remains quite dovish, with investors pricing a 50% chance of another super-sized rate cut in November. The US central bank started its easing cycle with a massive 50-bps rate cut. Powell noted that the reduction was meant to preserve the labor sector.
Since then, policymakers have voiced their support for the move, with most calling for more rate cuts. Therefore, traders are expecting more significant cuts before the year ends. However, as more data comes in, this outlook will keep changing.
US jobless claims (Source: Labor Department)
Notably, Thursday’s figures showed a resilient US economy that could allow the Fed to achieve a soft landing. Jobless claims dropped more than expected last week, indicating tight labor market conditions. At the same time, a GDP report showed steady growth, with corporate profits increasing fast.
Meanwhile, data on Friday revealed that the core PCE price index increased by 0.1%, missing estimates of 0.2%. Cooler-than-expected inflation gives the Fed more room to lower borrowing costs, which will, in turn, weigh on Treasury yields and boost interest futures.
After years of fighting sky-high inflation, policymakers are now convinced that the fight is nearly over. Inflation has consistently fallen in the second and third quarters and is nearing the 2% target. Traders are now focused on predicting the size and timing of future rate reductions.
More support for the bonds market came from a flight from risky assets amid fears of an escalation in the Middle East war. The conflict between Hezbollah and Israel intensified this week as the two fired missiles at each other.
Meanwhile, China has announced new measures to support its fragile economy. These efforts have boosted risk appetite, pushing more cash into riskier assets. China is a significant consumer of many commodities that impact the global economy. Therefore, a rebound in the fragile economy boosts investor sentiment and risky assets. Meanwhile, safer assets like bonds suffer.
