Interest Futures
Fundamental Analysis

Interest Futures Rise as US Employment Data Boost Rate Cut Expectations

  • US unemployment claims rose to 231,000 last week.
  • Investors are cheering signs of weakness in the labor market and have increased Fed rate cut expectations.
  • A decline in US inflation would go well with the recent weakness in the labor market. 

Interest futures rose Thursday as Treasury yields fell after US employment data boosted rate cut expectations. Consequently, investors bet that the Federal Reserve’s rate-cut cycle could start in September. Meanwhile, market participants were preparing for another round of US inflation data next week for more clues on the outlook for Fed rate cuts.

US jobless claims (Source: Labor Department)

US jobless claims (Source: Labor Department)

The US released its initial jobless claims report on Thursday, showing a big jump in unemployment. Claims rose to 231,000 last week, beating forecasts for an increase to 215,000. This relieved investors and raised hopes that the US labor market was slowly cooling. 

Last week, the US released more labor market data, including reports on nonfarm payrolls and job openings. The NFP report showed an unexpected drop in employment in April and an increased unemployment rate. Meanwhile, the vacancies report showed a drop in job openings to a 3-year low. This indicated fewer open positions per unemployed person.

These reports have shown a downtrend in the labor market consistent with a slowdown in the economy. If the trend continues, consumer spending power will decline, and demand in the overheated economy will drop. As a result, inflation will fall to the 2% target. However, the future remains uncertain. For now, investors are cheering the signs of weakness and have raised bets that the Fed will cut rates in September.

Moreover, there is confidence that the Fed will implement at least two cuts this year. This has gone up from one cut last week. Consequently, US treasury yields, which reflect interest rate expectations, fell. The yield on the 10-year note was at 4.6%, down from 4.7% a fortnight ago. 

Investors are now focused on next week’s US inflation report. They will monitor the wholesale and consumer inflation reports for more insight into what the Fed might do in the future. A decline in inflation would go well with the recent weakness in the labor market and increase bets for a Fed rate cut in September. On the other hand, higher-than-expected inflation would cloud the outlook for rate cuts and weigh on interest futures.