- US inflation data solidified bets for a September Fed rate cut.
- Data revealed that the US consumer was resilient in July.
- US jobless claims unexpectedly dropped to 227,000.
Interest futures plunged on Thursday as upbeat US economic data boosted risk appetite. At the same time, investors moved to price a lower likelihood of a 50-bps Fed rate cut at the September meeting. However, the move reversed on Friday as the probability of a 25-bps Fed cut rose.
As US inflation data solidified bets for a September Fed rate cut, interest futures rallied before Thursday. Wholesale inflation came in softer than expected in July. At the same time, consumer inflation data showed further easing in price pressures. Notably, the headline figure fell below 3%, increasing confidence that it will reach the Fed’s 2% target.
The trend reversed on Thursday when the US released better-than-expected economic reports.
US retail sales (Source: Census Bureau)
Data revealed that the US consumer was resilient in July. Retail sales jumped by 1.0%, well above expectations for a 0.3% increase. Meanwhile, data for the previous month was revised to show a 0.2% drop.
Demand in the US economy soared in July, easing fears of a recession. At the same time, expectations for a 50-bps rate cut in September fell. If the economy is still performing so well, then the Fed has room to implement small rate cuts.
The report increased risk appetite, allowing investors to flock to riskier assets like equities. Meanwhile, interest futures suffered. Furthermore, there was optimism that the Federal Reserve might achieve a soft landing, where inflation falls without significantly harming the economy.
A separate report on Thursday showed jobless claims unexpectedly dropping last week to reach 227,000. Meanwhile, economists had expected 235,000 claims. The main reason for the market turmoil at the start of August was a surge in the US unemployment rate. This raised fears that the economy would tip into a recession. However, unemployment claims data shows fewer jobless people since then, indicating resilience in labor market. As a result, recession fears have eased, and rate-cut bets have fallen.
After the reports, investors increased the likelihood of a 25-bps rate cut to 72.5%. Meanwhile, the probability of a 50b-ps cut fell to 27.5%. Rate cut expectations have moved wildly in recent weeks amid a series of mixed economic figures. Nevertheless, inflation has remained on a consistent downtrend, meaning the Fed will likely be ready to cut in September.
