- Interest futures signal a cautious sentiment amid central bank flurry.
- Markets are recalibrating after the Fed’s cautiousness and change of stance by other major central banks.
- Inflation reading is key to watch next week for more clues.
Interest futures are showing cautious sentiment as markets digest central bank actions and brace for fresh inflation data next week.
Traders now price in a 82% probability that the Fed will hold its rates in the next policy meeting as well, with overall reduced expectations for rate cuts in 2025. The shift follows a series of upbeat economic data, including yesterday’s initial jobless claims.
According to the CME FedWatch Tool, the rate cut probability is declining before September, with some contracts giving clues about a prolonged pause through year-end. Short-term treasury yields have gained in response, pushing 2-year notes near 4.90%.
Markets are now forced to recalibrate after the Fed’s cautious tone and sticky inflation readings. Interest futures signal a solid reason for a prolonged delay in the rate cuts.
Globally, the interest futures have also adjusted as the ECB is expected to aggressively cut rates this summer due to recession risk and stagnant growth. In the UK, SONIA futures also reflect the caution due to persistent wage growth and rising services inflation.
The divergence in rate expectations is driving strong volatility across currency and bond markets. Longer-dated interest futures remain more stable. However, front-end contracts are reacting sharply to central bank rhetoric and economic data.
Traders now brace for the April reading of US CPI next week, which may bring volatility in interest rate futures. A hotter-than-expected inflation reading could weigh on equities and credit markets, hinting at higher-for-longer policy rates.
