- The likelihood of a 50 basis points Fed rate cut in September fell.
- Data revealed a bigger-than-expected expansion in the US economy in the second quarter.
- US unemployment claims fell to 231,000 last week, below forecasts of 232,000.
Interest futures recovered slightly after falling on Thursday as US data showed a resilient economy, further reducing the risk of a recession. At the same time, the likelihood of a 50 basis points Fed rate cut in September fell. A stable economy means the US central bank can gradually lower borrowing costs.
US GDP (Source: Bureau of Economic Analysis)
Data on Thursday revealed a bigger-than-expected expansion in the US economy in the second quarter. Notably, the GDP grew by 3.0%, which is bigger than the forecast of 2.8%. The economy mainly expanded due to solid consumer spending. The figures dismissed fears of a looming recession.
At the beginning of the month, panic followed a poor employment report. Investors dumped risky assets amid concerns that the US economy was experiencing a rapid slowdown. Moreover, they moved to price a super-sized 50 bps rate cut. However, the likelihood of such a cut has fallen significantly since the economy remains resilient.
Nevertheless, Fed policymakers are ready to start cutting rates in September. The only difference is that they might vote for a smaller 25-bps rate cut.
A separate report showed further resilience in the US labor market. Unemployment claims fell to 231,000 last week, below forecasts of 232,000. Although it was a slight difference, it showed a relatively tight labor market, easing fears of deterioration.
Interest futures fell this week as it became clear that the Fed would cut rates gradually. Last Friday, prices rose after Powell gave a dovish speech at the Jackson Hole Symposium. He gave a green light on a September rate cut, leading to a decline in Treasury yields. This came after FOMC minutes showed a more dovish meeting.
Investors are fully pricing a cut in September. The only uncertainty is whether it will be significant or small. So far, data has pointed to the smaller cut. Later in the day, the core PCE inflation figure will give further guidance. Economists expect the report to show price pressures holding at 0.2% from the previous month. Cooler-than-expected figures will likely increase the chances of a more significant cut. On the other hand, if inflation meets forecasts or comes slightly higher, the Fed might implement a smaller rate cut.
