- The US economy expanded at an annual rate of 1.3% in the year’s first quarter.
- US jobless claims rose last week, showing some weakness in the labor market.
- US pending home sales fell by the most in about three years.
Interest futures recovered on Thursday as Treasury yields retreated from recent highs amid poor US data. Initially, interest futures had been plummeting after a poor US debt auction. However, this changed when data led to a slight increase in Fed rate cut expectations.
The bond market has had a rough week, with yields soaring to 4-week highs. Before a poor US GDP report, markets were reeling from better-than-expected US data, leading to a decline in rate-cut bets. Moreover, a poor bond auction showed less demand for US debt.
Elsewhere, data has shown that global bond supply might increase as central banks reduce their debt holdings. Analysts believe this could lead to a rally in yields, which would put downward pressure on interest futures. Investors are becoming wary of buying bonds when rate-cut bets are falling.
Investors are focused on incoming data from the US, which is slowly shaping the outlook for monetary policy. However, recent data has caused some uncertainty, showing weakness in a generally robust economy.
US GDP (Source: Bureau of Economic Analysis)
Data from the US on Thursday revealed some economic deterioration that could pressure the Fed to cut rates at least once this year. The US economy expanded at an annual rate of 1.3% in the year’s first quarter, missing estimates for 1.6%. Weakness in the US economy is a green light for the Fed to start lowering rates. However, policymakers must gain confidence that this trend will continue before shifting to a more dovish stance.
Meanwhile, data on unemployment claims revealed softness in the labor market, which could translate to higher unemployment rates. This would weaken consumer spending and reduce demand in the economy, which the Fed hopes to achieve before cutting interest rates. By the end of the day, the likelihood of a Fed rate cut in September rose above 50%.
This year, interest futures have fluctuated in a general downtrend due to a sharp drop in rate-cut expectations. Investors and policymakers eagerly await more evidence that US inflation is on a clear path to the 2% target. Until then, the trend will likely remain down. However, as long as there is a chance that the Fed will start cutting rates, the uptrend from last year could resume.
