- Data on unemployment benefits in the US revealed a higher-than-expected decline.
- Fed’s Barkin said the central bank needs more time to assess the state of inflation.
- Shares of New York Community Bancorp (NYCB) fell 6.5%.
Interest futures collapsed on Thursday while Treasury yields rose as data from the US and policymakers continued to point at delayed Fed rate cuts. Labor market data from the US showed strength in the sector despite high interest rates. This gives the Fed room to keep interest rates high and lower inflation. At the same time, speeches from several Fed policymakers showed a reluctance towards imminent rate cuts.
US jobless claims (Source: Labor Department)
Data on unemployment benefits in the US revealed a higher-than-expected decline, indicating strength in the labor market. The number of US citizens making their first claims on these benefits fell by 9,000 last week. As a result, market participants now expect fewer rate cuts in 2024, totaling 115 basis points. This is a drop from the 140 basis points before last Friday’s employment report. At the same time, chances of the first rate cut coming in March have fallen to 16.5%, according to the CME FedWatch Tool.
Moreover, the strength in the labor market and consequent drop in rate cut expectations has boosted Treasury yields. Yields on the two-year Treasury, which reflects interest rate expectations, climbed to 4.456%. When the cost of borrowing money rises, the price of bonds falls, leading to a decline in interest futures.
More pushback on rate cut expectations came from hawkish remarks from Fed speakers. Richmond Fed President Thomas Barkin said the central bank needs more time to assess the state of inflation. The US economy has shown resilience in the past few months. Therefore, there is no imminent risk of a recession. This gives the Fed ample time to watch and see if inflation is falling towards its target. Only then can they start cutting rates.
Meanwhile, Boston Fed President Susan Collins expects 75 basis points of rate cuts in 2024. This is well below the current market expectation of 115 basis points, showing policymakers are much less dovish than the market expects.
However, some uncertainty in the US banking sector supported interest futures. On Thursday, shares of New York Community Bancorp (NYCB) fell 6.5%. This came after the bank received a third downgrade on its credit rating from Morningstar. The downgrade came because the bank is overexposed to the shaky US commercial Real Estate. Investors usually rush to the safety of bonds when there are signs of a looming banking crisis.