- There was an unexpected decline in US initial jobless claims last week.
- The S&P Global survey showed a drop in business activity in the US services sector.
- Interest futures got some support from safe-haven demand as the Israel-Hamas war escalated.
Interest futures fell on Thursday as more positive US economic data pushed back expectations for Fed rate cuts. However, investors became risk averse as geopolitical tensions escalated, putting a floor on further declines.
US jobless claims (Source: Labor Department)
Data released on Thursday revealed an unexpected decline in US initial jobless claims last week, showing resilience in the labor market. Additionally, it means that the Fed will be in no hurry to cut interest rates. As a result, Treasury yields rose while interest futures declined.
On several occasions, Fed policymakers have described the labor market as tight, meaning demand is still high. This demand can still drive inflation higher. Therefore, the central bank will likely keep interest rates high to ensure inflation returns to its 2% target.
The Fed meeting minutes released on Wednesday revealed that policymakers were worried about cutting rates too soon as it could lead to a resurgence in inflation. Additionally, there was no clarity on when the central bank might start reducing interest rates. This led to a rise in Treasury yields, which reflect interest rate expectations.
Notably, the Fed’s Thomas Barkin said that data released after the last Fed meeting has shown resilience in the economy. As a result, there is very little chance that the Fed will start cutting rates soon.
However, a separate report released on Thursday revealed a slowdown in business activity in the US. The S&P Global survey showed a drop in business activity in the services sector, supporting the view that inflation is in a downtrend. However, Fed policymakers need more such reports to confirm the downtrend.
Interest futures got some support from safe-haven demand as the Israel-Hamas war escalated. The conflict in Gaza worsened after Israel hit Rafah, killing civilians. This new strike comes despite calls for an end or temporary ceasefire in the war by the UN.
Members of the UN were firmly against Israel’s plans to attack Rafah, as it has become a refuge for Palestinians escaping the war. Therefore, there are a large number of innocent people in the region. However, Israel has gone on with its plans, dimming hopes for an end to the war. In times of uncertainty, investors prefer safe assets like bonds.
