- Interest futures rallied last week and extended gains on Monday as investors panicked after poor US data.
- US data showed a drop in unemployment claims to 233,000.
- The US will release the Consumer Price Index report next week.
Interest futures fell Thursday as Treasury yields rebounded after better-than-expected US employment data. At the same time, prices retreated as risk appetite improved after a period of economic uncertainty that boosted bond markets.
Interest futures rallied last week and extended gains on Monday as investors panicked after poor US data. The nonfarm payrolls report revealed slower job growth and a spike in unemployment. As a result, investors feared that the US economy was rapidly slowing down. Most worried that the Fed had taken too long to lower borrowing costs.
The turmoil was bullish for bonds, which are considered safer assets than equities. In times of uncertainty, investors prefer to buy safe assets. At the same time, rate cut expectations soared, weighing on Treasury yields. After the jobs report, markets fully priced a 50 bps rate cut in September.
However, the rally ended quickly when data on Monday showed that the US services sector remained strong. This report reduced recession fears and allowed investors to return to riskier assets. Additionally, Fed policymakers said the poor jobs report did not necessarily mean a recession. Nevertheless, they acknowledged that there was more pressure to lower borrowing costs.
US unemployment claims (Source: US Labor Department)
The retreat for interest futures continued on Thursday after data showed a drop in unemployment claims to 233,000. Economists had expected claims to come in at 240,000. The report further calmed investors because it showed the labor market is still resilient. At the same time, it eased pressure on the Fed to cut interest rates. As a result, rate cut expectations eased slightly, allowing Treasury yields to climb.
The Fed will undoubtedly start lowering borrowing costs in September. However, before the September meeting, several major reports might cause volatility and changes to rate cut expectations. Notably, the US will release the Consumer Price Index report.
The last few reports have shown easing price pressures. If this trend continues, it will solidify September rate-cut bets and boost interest futures. On the other hand, if inflation pauses its decline, investors might return to pricing in a smaller 25 bps rate cut in September.
