- US initial jobless claims fell from 219,000 to 213,000 last week.
- The market is pricing a 59.4% chance of a 25-bps move in December.
- Economists expect US business activity to increase in October.
Interest futures fell on Thursday as the dollar, and Treasury yields rose on upbeat US employment data. However, by Friday, prices recovered as market participants awaited the US manufacturing and services PMI figures.
US jobless claims (Source: Labor Department)
Data on Thursday revealed that US initial jobless claims fell from 219,000 to 213,000 last week. Meanwhile, economists had expected an increase to 220,000 claims. The unexpected drop was a sign that unemployment remains low. Therefore, the labor market remains resilient. Robust demand in the labor market means the Fed has more room to keep interest rates at restrictive levels, boosting Treasury yields and the dollar.
Market participants are closely monitoring US economic data, which will show whether or not the Fed will cut rates in December. Currently, the market is pricing a 59.4% chance of a 25-bps move in December. The next major report is the flash manufacturing and services PMI report. According to estimates, business activity in the manufacturing sector might increase from 48.5 to 48.8. Meanwhile, the PMI might rise from 55.0 to 55.2 in the services sector.
Better-than-expected numbers will show robust business activity levels in the US, reducing bets for a December rate cut. In this case, interest futures would collapse. On the other hand, downbeat numbers will solidify bets for a December rate cut, boosting interest futures.
The bond market has been on a downtrend since Donald Trump won the US elections. His proposals on fiscal policy have created a brighter outlook for Treasury yields and the dollar. Meanwhile, the outlook for interest futures has dimmed. Trump’s tax cut and tariff proposals will likely reheat the US economy and push up inflation. Therefore, The Fed will have the difficult task of ensuring that price pressures remain at healthy levels. Consequently, experts are forecasting fewer rate cuts and more pauses.
Meanwhile, interest futures have gained some support from rising geopolitical tensions, which have dampened risk appetite. The escalating war between Russia and Ukraine this week has led to a rush out of risky assets such as equities. Meanwhile, safer assets like bonds stabilized, pausing their recent collapse. However, investors preferred the safer options like the yen and gold.
