- A mix of data since Tuesday has led to a surge in Fed rate cut expectations, boosting interest futures.
- A weak labor market and softer-than-expected inflation will favor a significant rate cut.
- The US economy added 142,000 jobs in August, missing forecasts of 165,000.
Interest futures rose on Thursday and Friday as the dollar and Treasury yields fell after a mix of economic indicators. Prices have rallied the whole week as investors increased the likelihood of a 50 bps Fed rate cut in September.
A mix of data since Tuesday has led to a surge in Fed rate cut expectations, boosting interest futures. There is little doubt that the Fed will start lowering borrowing costs this month. However, the remaining major reports on employment and inflation could determine the size of this rate cut. A weak labor market and softer-than-expected inflation will favor a significant rate cut.
Notably, the first report this week showed weaker-than-expected business activity in the US manufacturing sector. The report led to a collapse in equities as investors fled risk. Meanwhile, the bond market rallied with rate cut expectations.
After that, US employment data revealed that job vacancies in the US dropped, surprising economists who had expected an increase. The report was a clear sign that demand in the labor market had fallen. The labor sector drives a big part of the economy. Therefore, any unnecessary weakness could plunge the economy into a recession.
US private employment (Source: ADP Research Institute)
Another employment report on Thursday showed that private-sector job growth was slower than expected. Private jobs increased by 99,000 compared to estimates of 144,000. This report was a leading indicator of the NFP. Consequently, markets raised the likelihood of a 50bps rate cut.
However, the jobless claims report soothed worries about the labor market. Unemployment claims fell more than expected last week, showing some tightness in the sector.
Furthermore, the ISM released the US services PMI which showed a bigger-than-expected expansion. Strong business activity is a sign of a resilient economy. Therefore, fears of a rapid decline eased. Nevertheless, the cumulative effect of these economic reports was an increase in rate-cut expectations.
However, market participants have remained cautious ahead of the nonfarm payrolls report. According to the figures the US economy added 142,000 jobs in August, missing forecasts of 165,000. However, the unemployment rate held at 4.2% as expected. Furthermore, average hourly earnings beat estimates.
