Worries about economic recession! Some traders are betting on a 50 basis point rate cut by the Federal Reserve in September

With the continuous rise of US Treasury bonds for the third consecutive month, speculation about whether the Federal Reserve will make a significant interest rate cut has been rampant recently.

Some traders continue to increase their positions, betting that the Federal Reserve will make a one-time substantial 50 basis point rate cut in September. The market had already fully priced in predictions of at least two 25 basis point rate cuts by the Federal Reserve earlier.

Although the 50 basis point bet is not mainstream, analysts believe that it reflects the market's concerns about a recession. Currently, the steepening of the US Treasury yield curve is significant, and the market is closely watching the Federal Reserve interest rate decision and press conference scheduled for this Wednesday.

Why is the market so optimistic about rate cuts?

Despite some easing of US inflation, both businesses and consumers are feeling the pressure of benchmark interest rates at a 20-year high. Investors are increasingly worried that cracks may be appearing in the labor market, sparking concerns about an economic recession.

The non-farm payroll data released at the beginning of the month showed a significant cooling of the labor market. The US unemployment rate unexpectedly rose to the highest level in two and a half years in June, with non-farm payrolls growing by 206,000, a significant decrease from the previous 272,000.

Jack McIntyre, portfolio manager at Brandywine Global Investment Management, said, "It is fair to say that if the labor market shows more signs of weakness, the economic situation will worsen, prompting the Federal Reserve to further cut interest rates."

Anxiety in the market about the Federal Reserve staying put reached a new level last week. Former New York Fed President William Dudley and Mohamed El-Erian both stated that if rates are kept high for too long, the Federal Reserve "could make a big mistake." Dudley even called on the Federal Reserve to take action on rate cuts at this week's policy meeting.

In the bond market, traders have begun to anticipate that the Federal Reserve may adopt a loose monetary policy, with short-term bond yields declining, showing a steepening yield curve. The yield on the US 2-year Treasury bond has dropped by 0.41%, now standing at 4.371%.

However, some analysts are cautious about rate cuts. They believe that the fundamentals of the US economy are strong and do not require an immediate rate cut. J.P. Morgan stated in a report on Friday that they expect Powell to "avoid holding any specific meetings for the first rate cut." They also believe that there is currently not enough reason to support a rate cut by the Federal Reserve.

Investors are closely watching this Wednesday's Federal Reserve interest rate decision and Powell's monetary policy press conference to find more clues about the future direction of monetary policy