- US10Y futures fell to three-week lows as GDP and labor data reduced the odds of aggressive Fed cuts.
- Markets now price fewer than three cuts through mid-2026, down from nearly four earlier this month.
- Core PCE data and Fed speeches in the coming sessions could drive renewed volatility in rate contracts.
US interest futures came under selling pressure this week as upbeat US data prompted traders to scale back aggressive bets for rate cuts. The Fed’s meeting in September delivered a 25-bps rate cut, but Fed Chair Powell stressed that the policy will remain data-dependent with no pre-commitment to a cutting cycle.
The Fed’s nuance, combined with strong macro prints, rippled across the interest futures complex. The US 10-year Treasury Note (ZN) fell to three-week lows, reflecting higher yields as traders demanded a premium for stronger growth. The September contract fell under 108-00, with the benchmark 10-year yield above 4.3%. Eurodollar and SOFR also repriced, with the probability of the October rate cut dropping to 81% from 94% earlier this week. Longer-dated contracts are now pricing less than three cuts through 2026, compared to four cuts at the beginning of September.
Much of the shift was driven by the US Q2 GDP revision, which highlighted the strength of the labor market. The GDP data was revised to 3.8% yearly from 3.3%, while weekly jobless claims fell to 218k, the lowest since July. The resilience undermined the Fed’s urge for a quicker easing, pressuring the futures lower. Meanwhile, the Fed members remain divided on the matter, with some advocating for a faster cut while others warn of persistent inflation. The divergence is triggering volatility in the interest rate contracts, particularly in the belly and long end of the curve.
The yield curve has also been adjusting, with investors demanding a higher yield to hold duration despite growth not slowing as anticipated. The curve remains inverted but has steepened in recent sessions, as the long end is selling off more rapidly than the front.
Outlook: What to Watch Ahead
- Friday’s core PCE inflation release is pivotal. A hotter-than-expected reading would likely dent cut expectations further and push down futures pricing for Fed easing.
- Fed commentary from speaking members Barkin and Bowman may recalibrate sentiment midweek.
- Continued labor data: Any signs of strength or deterioration in job openings will strongly influence futures pricing.
- Market reactions to these data could adjust not just short-term cuts but expectations into 2026. If inflation reaccelerates, markets may begin to price in fewer cuts next year as well.
