- US jobless claims dropped last week to 227,000, compared to expectations of 243,000.
- US business activity data showed growth in the manufacturing and services sectors.
- Markets have moved to price a 29% chance that the Fed will implement just one more cut in 2024.
Interest futures rose on Thursday and Friday as Treasury yields dropped despite upbeat US economic data. Nevertheless, prices remained near recent lows and will likely end the week down due to a shifting Fed rate cut outlook and the looming US presidential election.
10-year US Treasury yield (Source: Bloomberg)
Data on Thursday showed that the US economy continues to show resilience despite high interest rates. As a result, market participants are increasingly pricing just one rate cut this year, which has boosted yields in recent weeks.
Notably, US jobless claims dropped last week to 227,000, compared to expectations of 243,000. The decline indicated a robust labor market that is employing more people. Initially, the Fed’s biggest worry had been the labor market. However, since the August NFP scare, employment has remained high while unemployment has dropped. Consequently, there is less pressure on the central bank to continue cutting rates aggressively.
At the same time, business activity data showed growth in the manufacturing and services sectors. The US manufacturing PMI rose to 47.8, above forecasts of 47.5. Similarly, the service PMI increased to 55.3, which is above the estimated 55.0. As a result, the composite PMI came in at 54.3 in October after reaching 54.0 in the previous month.
Markets have moved to price a 29% chance that the Fed will implement just one more cut in 2024. This follows the recent better-than-expected economic data. At the same time, policymakers have grown more cautious, giving few clues about the pace and size of future rate cuts. Traders will now focus on the upcoming nonfarm payrolls report for more clues on future Fed policy moves.
Elsewhere, investors have kept a close eye on Middle East tensions that have escalated this week. The conflict between Israel and Hezbollah and Israel and Gaza heated up, sending the dollar and Treasury yields higher.
Furthermore, interest futures have collapsed ahead of the US presidential election. Experts believe that Trump and Kamala Harris have policies that could lead to higher inflation. However, Trump is more likely to create a challenging environment for Fed rate cuts. Nevertheless, it is a tight race that has created a lot of uncertainty.
