- Business activity in the US manufacturing and services sectors contracted.
- The US economy added 139,000 new jobs in May, slightly more than the forecast of 130,000.
- The US president added to tariff worries by doubling levies on steel and aluminium imports.
Interest futures collapsed on Friday as Treasury yields soared after a better-than-expected US employment report. The upbeat nonfarm payrolls report led to a decline in Fed rate cut expectations as fears of a rapid US economic downturn eased.
Initially, the week started badly for the dollar and Treasury yields. Meanwhile, interest futures were steady before rallying on Wednesday. Economic data throughout the week had painted a picture of softness, leading to an increase in expectations for a Fed rate cut. Business activity in the manufacturing and service sectors contracted, while private employment came in significantly below estimates.
US jobless claims (Source: US Labor Department)
Moreover, unemployment claims soared, indicating weak demand. As a result, traders were expecting a downbeat employment report. However, data revealed that the US economy added 139,000 new jobs in May, slightly more than the forecast of 130,000. Meanwhile, average hourly earnings jumped by 0.4% compared to estimates of 0.3%. Finally, the unemployment rate came in line with expectations at 4.2%.
The upbeat reports eased worries that Trump’s tariffs have dented the economy. With recession fears dropping, the Fed is feeling less pressure to lower borrowing costs. Policymakers might wait to see if tariffs will have a significant impact on inflation.
Elsewhere, traders paid attention to trade negotiations. Initially, there was optimism when Trump called on countries to provide offers for negotiations by Wednesday. However, since then, progress has been slow.
Meanwhile, the US president added to tariff worries by doubling levies on steel and aluminium imports on Wednesday. The move caused a scramble for safety that supported interest futures. More tariffs will keep the risk of a global trade war alive.
Moreover, during the week, Trump accused China of violating some agreements in their trade deal. This also caused some tensions. However, tensions eased slightly on the hopes that the leaders of the two countries would talk on the phone.
Next week, market participants will watch the US inflation figures. These will shape the outlook for Fed rate cuts. Cooler-than-expected numbers might give policymakers the confidence to lower borrowing costs. On the other hand, if inflation remains hot, rate cut expectations will ease further, weighing on interest futures.
