- The US released data showing a bigger-than-expected 0.9% increase in US import prices.
- US unemployment claims fell from the previous week, leading to fears that the labor market will remain tight.
- Fed policymakers remained cautious on Thursday despite signs of easing consumer inflation.
Interest futures fell on Thursday after reaching new highs due to increased Fed rate cut expectations. The pullback came amid inflation worries after new economic data from the US. Still, interest futures are heading for a bullish week with increased rate-cut optimism.
On Thursday, the US released data showing a bigger-than-expected 0.9% increase in import prices. As a result, it undid some of the optimism brought about by the recent downbeat inflation figures. The Fed is keen to see a downtrend in inflation and any other possible sources of price increases. Therefore, if inflation in the country is falling but import prices increase, the central bank will remain cautious. Increased import inflation could undo what the Fed has achieved in bringing down inflation.
US jobless claims (Source: Labor Department)
There was more downward pressure on rate cut expectations when the US revealed that unemployment claims fell from the previous week, leading to fears that the labor market will remain tight. Recent data has shown signs of cooling in the US labor market. However, there has been no confirmation that this decline will continue. Therefore, there is still a chance that the previous bullish trend will resume. Such a case would lead to a drop in rate cut expectations, increasing Treasury yields, and lowering interest futures.
Meanwhile, Fed policymakers remained cautious on Thursday despite signs of easing consumer inflation. There was a welcome decline in US inflation in April, rekindling hopes that the downtrend from last year would remain intact. As a result, there was a spike in rate-cut bets, with market participants now anticipating two 25 bps rate cuts this year. Meanwhile, the likelihood of a cut in September rose to 70%.
Fed’s Loretta Mester said that the Fed’s current high rates will likely help bring inflation down to the 2% target. Meanwhile, Thomas Barkin noted that inflation was still high and had not reached where it should be. Policymakers are still not confident enough to conclude that inflation will fall to the central bank’s target. Therefore, they remain cautious about committing to a specific time when rate cuts might begin.
