- Sentiment changed to bullish this week as the US released inflation data.
- US unemployment claims surged to a 10-month high of 245,000.
- US producer prices fell by 0.2% in May after a 0.5% increase in the previous month.
Interest futures surged Thursday while Treasury yields fell to new lows in the month due to increased bets for a Fed cut in September. Prices are heading for a bullish week marked by softer US consumer and producer inflation numbers.
Interest futures reversed most gains last week on Friday when the US released a blockbuster jobs report showing a bigger-than-expected surge in employment. Treasury yields soared as investors lowered the chances of a Fed rate cut.
However, sentiment changed to bullish this week as the US released downbeat inflation data. The Consumer Price Index was the first report that raised bets for Federal Reserve rate cuts. The numbers came in flat for the month, showing no price increases. This was lower than the forecast for a 0.1% increase.
At the same time, the annual figure increased by 3.3% compared to estimates of 3.4%. This was the second time that consumer prices came in below forecasts. Therefore, there was more optimism in the market that Fed policymakers would gain confidence to cut interest rates.
However, this was not the case at the policy meeting later in the day. Powell struck a more hawkish tone than expected when he said the economy remained robust despite the decline in inflation. Moreover, the Fed forecast only one rate cut this year in December. This was a drop from the previous forecast of three rate cuts and was lower than market expectations for two. Still, market participants remained optimistic, hoping the Fed will cut rates in September.
These expectations rose on Thursday when the US released more economic data showing a decline in the labor market and wholesale inflation. US unemployment claims surged to a 10-month high of 245,000 from the previous month’s 229,000. This indicated a drop in demand in the labor sector that could push the Fed to start lowering borrowing costs.
US wholesale inflation (Source: Bureau of Labor Statistics)
Meanwhile, producer prices fell by 0.2% in May after a 0.5% increase in the previous month, with the annual figure increasing by 2.2%, further bolstering Fed rate cut bets. Despite the Fed’s more hawkish outlook, markets are pricing in a 60.5% chance that the central bank will cut rates in September.
