- US Treasury yields started the year strong amid expectations for a slow Fed easing cycle in 2025.
- Market participants expect economic strength with Trump as the new president.
- US unemployment claims unexpectedly dropped.
Interest futures hovered near recent lows as Treasury yields and the dollar opened the year green. Prices ended the year with a plunge following a hawkish December Fed meeting. On the other hand, the prospect of higher rates for longer boosted yields and the dollar.
US Treasury yields started the year strong amid expectations for a slow Fed easing cycle in 2025. The US Federal Reserve met in December and cut rates by 25-bps. However, the meeting was hawkish since policymakers projected only two rate cuts in 2025, totaling 50-bps. This was a massive drop from the September forecast of 100-bps. Furthermore, it showed that policymakers have lost confidence in the progress to lower inflation.
Towards the end of 2024, data revealed that US inflation had paused its decline. At the same time, the economy remained robust despite high interest rates. Consequently, Fed officials assumed a cautious tone. The bond market suffers when rates are high.
Market participants also expect further economic strength with Trump as the new president. Trump takes office on January 20th, and investors will wait to see if he will pass his policy changes. During the campaigns, he promised to lower taxes and impose tariffs on imported goods, among other changes. Moreover, the Republican party holds a majority of seats in both houses of Congress. Therefore, analysts believe it will be easy to pass these policy changes. As a result, business conditions in the US will increase. At the same time, demand for local goods will surge. Meanwhile, price pressures will reheat, forcing the Fed to keep interest rates at restrictive levels longer. This outlook is bullish for Treasury yields and the greenback but bearish for equities and bonds.
However, there is some uncertainty regarding the new administration, which has caused a flow of cash from risky assets like equities to the safer dollar. Meanwhile, interest futures have paused their decline.
Elsewhere, data on Thursday revealed that unemployment claims unexpectedly dropped to 211,000 last week. Meanwhile, economists had expected an increase from 220,000 to 222,000. The drop was an indicator of resilience in the labor market that will likely keep the Fed cautious this year. Investors will now watch the ISM manufacturing PMI report for more clues on future Fed moves.
