- Recent data has failed to support the outlook for early rate cuts.
- Powell confirmed that the next move would be a rate cut.
- US unemployment claims missed forecasts, holding at 208,000 last week.
Interest futures rose on Thursday as markets applauded Powell’s less hawkish tone after the FOMC policy meeting. At the same time, investors were gearing up for April’s US employment figures, which will give more direction on Fed rate cuts.
Going into the FOMC meeting, there were concerns that policymakers would be more hawkish than usual. The Fed adjusts its policy outlook with incoming data. As a result, it is highly data-dependent. However, recent data has failed to support the outlook for early rate cuts as inflation has paused its decline. Consequently, policymakers have lost confidence that inflation will fall to the 2% target.
Moreover, their tone has gone from dovish to hawkish. For this reason, there was an expectation in the market that the Fed would signal a possible rate hike to tame inflation. This would have wiped out expectations for rate cuts, leading to a sharp decline in interest futures and increased Treasury yields. However, Powell confirmed that the next move would be a rate cut. Nonetheless, he said they would prolong the period for higher interest rates to give inflation time to return to its downtrend. Investors are pricing in a 60% chance that the Fed will cut rates in September.
Elsewhere, data from the US showed continued strength in the labor market, which has kept the Fed on its toes. US unemployment claims missed forecasts, holding at 208,000 last week. This came after the private employment figures revealed a bigger-than-expected increase in employment. Investors eagerly await the nonfarm payrolls report for more clues on the state of demand in the labor market.
US job growth (Source: Bureau of Labor Statistics, Bloomberg)
Economists believe employment will drop to 238K from the previous month’s 303K. Meanwhile, they expect the unemployment rate to hold steady at 3.8%. If the figures align with expectations, there will be little volatility in the market. However, the chances of that happening are low, as shown above. The figures could come in higher than expected or lower than expected.
Fed rate cut expectations will likely decline if employment beats forecasts. It could push the expected timing for the first cut to December. On the other hand, there will be some relief for the Fed if employment misses forecasts. This would solidify expectations for a September cut.