- Investors have cheered the higher likelihood of a Fed rate cut in September.
- Powell indicated growing confidence in the progress to lower inflation.
- US unemployment claims rose to reach 243,000 last week.
Interest futures fell on Thursday as investors took profits after the recent rally on a September Fed rate cut. The US unemployment claims data shows that more people are becoming unemployed, which will likely force the Fed to reduce interest rates in September.
Interest futures have been bullish since last week as investors cheered the higher likelihood of a Fed rate cut in September. The last inflation report confirmed that price pressures were steadily declining. Therefore, there is a higher chance inflation will reach the 2% target.
Notably, when Powell spoke at the beginning of the week, he indicated growing confidence in the progress to lower inflation. However, he maintained that the outlook for rate cuts depended on incoming data. Other policymakers who spoke during the week had a similar message. Therefore, there is a 100% chance the Fed will cut rates in September. Moreover, despite upbeat economic figures, this outlook has stayed the same throughout the week.
On Tuesday, US retail sales data revealed stronger-than-expected consumer spending. Although sales remained unchanged in June, it showed better performance than the forecast of a 0.3% decline. This boosted the US dollar and Treasury yields. However, it had little impact on the outlook for Fed rate cuts.
US jobless claims (Source: Labor Department)
By Thursday, investors had already priced in the Fed rate cut and were taking profits. As a result, prices retreated. Meanwhile, data from the US continued supporting a looming shift to lower borrowing costs. Unemployment claims rose to reach 243,000 last week, beating estimates of 230,000.
The labor market has shown weakness in recent months, with unemployment rising. Slowing demand in this sector is the best catalyst for the Fed to shift to cutting interest rates. A decrease in job opportunities and a rise in unemployment rates directly impact consumer spending, subsequently resulting in a decline in economic growth. It also means lower inflation.
Although policymakers are still cautious about committing to a rate cut, the market fully expects one in September. However, more economic reports before then might change this outlook, making policymakers hesitate to call for rate cuts. Still, in the markets, the Fed’s policy path is clear and supports higher prices for interest futures.
