- Trump announced a period of investigations before implementing reciprocal tariffs.
- The US monetary policy outlook suggests further downside for interest futures.
- US inflation increased by 0.5% in January, well above estimated 0.3%.
Interest futures hovered near Thursday’s highs when Treasury yields collapsed due to delays on Trump’s reciprocal tariffs. However, since Friday last week, interest futures have collapsed due to upbeat US economic data and a decline in Fed rate cut expectations.
Thursday was a bullish day for interest futures after Trump announced a period of investigations before implementing reciprocal tariffs. When Trump announced the new tariffs on Monday, there was panic in the markets of a global trade war. As a result, Treasury yields and the dollar soared. Meanwhile, interest futures collapsed. However, the trend reversed with reports of delays. Market participants believe this delay will give countries time to negotiate, reducing the risk of trade wars.
Nevertheless, the US monetary policy outlook suggests further downside for interest futures. Since last week, economic data has pointed to a resilient economy with high price pressures. As a result, market participants expect the Fed to keep rates elevated for longer. Notably, the monthly employment report revealed that the US unemployment rate unexpectedly fell to 4.0% in January, indicating solid demand for labor. This overshadowed a slight decline in job growth and reinforced expectations for a hawkish Fed.
Meanwhile, data this week revealed that consumer inflation increased by 0.5% in January, well above estimates of 0.3%. Meanwhile, the annual figure increased by 3.0%, above forecasts of 2.9%.
US wholesale inflation (Source: Bureau of Labor Statistics)
Meanwhile, wholesale inflation data on Thursday showed an increase of 0.4%, above estimates of 0.3%. The upbeat figures led to a drop in Fed rate cut expectations, which boosted Treasury yields and weighed on interest futures.
Inflation has paused above the Fed’s 2% target for some time, keeping policymakers cautious. Furthermore, experts believe Trump’s tariffs will lead to a spike in inflation as local demand surges. If this is the case, rate cut expectations will keep dropping. Currently, market participants are only fully pricing one rate cut in 2025. If data continues beating estimates, the Fed might not lower borrowing costs at all this year.
Investors are now watching the upcoming retail sales report. Economists expect sales to drop by 0.2%. This would be a sharp decline from the previous reading of 0.4%. Moreover, it would indicate slower consumer spending, boosting rate-cut bets.
