- Since Tuesday, interest futures have declined as the outlook for rate cuts in the US shifted.
- Data from the US showed economic resilience.
- The US ISM services PMI jumped to 54.9.
Interest futures fell on Thursday and Friday as Treasury yields rose while Fed rate cut expectations fell after upbeat US data. Market participants moved to price a higher chance of a small rate cut during the November meeting.
Since Tuesday, interest futures have declined as the outlook for rate cuts in the US shifted. The change started on Monday when Powell spoke and said the central bank would likely cut by 25-bps in November. Initially, markets were pricing an over 50% chance of another big cut in November. However, this figure fell to 33% by the end of the week.
Furthermore, data from the US showed economic resilience, supporting a smaller rate cut. The first upbeat report showed job openings jumping to a higher-than-expected 8.04 million, indicating robust demand for labor. More labor market data showed that the private sector added 143,000 jobs in September, well above forecasts for a 124,000 increase. A strong labor market means that the Fed will likely stick to a slow pace for rate cuts in the future.
Before this week, data had started showing some weakness in the sector, which had raised fears of a recession. Notably, when the Fed cut rates by 50-bps, Powell said it was meant to keep the unemployment rate low. Therefore, if the sector has regained stability, there is less urgency for the central bank to cut rates.
US services PMI (Source: ISM)
At the same time, other sectors of the US economy have remained resilient. The ISM services PMI on Thursday jumped to 54.9, while economists had expected it to come in at 51.7. The services sector drives a large part of the US economy, so expansion is a sign that the economy is steady. This means the Fed will likely achieve a soft landing. However, it also means a gradual rate-cutting cycle.
Market participants are now awaiting the US nonfarm payrolls report. The forecast shows an increase of 148,000 jobs in September. Meanwhile, the unemployment rate might pause at 4.2%. Upbeat figures will reinforce bets for a small rate cut in November, boosting yields and weighing on interest futures. On the other hand, a downbeat report would return bets for a massive cut, boosting interest futures.
