- Investors have digested several reports showing weaker demand in the US economy.
- The initial jobless claims report revealed an unexpected increase.
- Investors are pricing in a 68% chance that Fed policymakers will vote for an interest rate cut in September.
Interest futures increased on Thursday due to lower Treasury yields and a weaker dollar, signaling further evidence of a slowdown in the US economy. Prices will end the week strong, as poor US data over the week has strengthened the case for two Federal Reserve rate cuts this year.
This week, investors have digested several reports showing weaker demand in the US economy, especially the labor sector. Notably, the US manufacturing sector contracted further in May, with the business activity index falling from 49.2 to 48.7.
After that, US job openings came in lower than expected. A smaller number of job vacancies is a sign that the demand for labor is gradually cooling. Fewer people will have money if fewer jobs are available, and consumer spending will go down. This would, in turn, lower inflation.
Meanwhile, Thursday’s initial jobless claims report revealed an unexpected increase that could reflect a higher unemployment rate. Claims rose from 221,000 to 229,000 when economists had expected a slight drop to 220,000.
The cumulative effect of the above figures was a surge in rate-cut expectations. Investors are pricing in a 68% chance that Fed policymakers will vote for an interest rate cut in September. Moreover, they believe the Fed will implement two cuts this year.
US labor market (Source: Bureau of Labor Statistics, Bloomberg)
However, the bigger economic report will be the non-farm payrolls report on Friday. Economists expect a slight increase from last month’s figure. However, the forecast is below the Q1 average. If employment in the US increases more than expected, it will paint a mixed picture of the US economy, clouding the outlook for interest rates.
On the other hand, if employment misses forecasts, the likelihood of a cut in September will likely go above 70%. Investors will also keep a keen eye on the unemployment rate, which could signal further deterioration in the labor market.
The European Central Bank became the second major central bank to cut interest rates on Thursday, opening the door for more global rate cuts. However, Fed policymakers still seek evidence that inflation will reach the 2% target. Otherwise, they will keep holding high interest rates, weighing on interest futures and boosting Treasury yields.
