- Treasury yields had a bullish day on Thursday as US economic data eased fears of a hard landing.
- US unemployment claims rose from 228,000 to 232,000 last week.
- US business activity edged lower in August.
Interest futures fell on Thursday as Treasury yields soared with a drop in expectations for a 50 bps Fed rate cut. However, the move reversed before Fed Chair Jerome Powell’s speech on Friday. At the same time, there is still optimism about a 25 bps September Fed rate cut.
Treasury yields had a bullish day on Thursday as US economic data eased fears of a hard landing in the US. Initially, yields fell due to worries that the economy was slowing down rapidly. Markets rushed to price in a super-sized 50 bps rate cut. However, data has shown a very different picture after the US monthly jobs report. Retail sales jumped in July, indicating a still resilient US consumer.
On Thursday, data showed further weakness in the economy. However, the slowdown is gradual and not as rapid as markets initially feared. Unemployment claims rose from 228,000 to 232,000, indicating a cooling labor market. Although the figures were poor, they met expectations. Therefore, the labor market is doing what most had expected.
US business activity (Source: S&P Global PMI)
Meanwhile, business activity edged lower in August, with the US Composite PMI falling from 54.3 to 54.1. Nevertheless, it remained in expansion, indicating a healthy economy. After these reports, investors grew more convinced that the Fed does not need to cut rates significantly. Therefore, there is a higher chance of a smaller 25 bps rate cut.
Meanwhile, Fed policymakers, including Raphael Bostic and Alberto Musalem, supported a rate cut at the September meeting. The FOMC meeting minutes released earlier this week showed policymakers had dropped their cautious tone. Most were ready to lower borrowing costs at the next meeting, while some were willing to start immediately.
Investors have always been more dovish about the outlook for rate cuts. However, policymakers have remained cautious, fearing a spike in inflation. Their tone has changed because price pressures have eased significantly. Moreover, there is only one CPI report left before the next meeting. Even if there is a spike, the recent progress is enough to warrant a rate cut.
Markets await Powell’s speech for more clues on what might happen after September. If he signals more cuts, Treasury yields will fall, boosting interest futures.
