Market expectations change in an instant! Will the Federal Reserve only cut interest rates once next?
On Friday, the bond market saw a shift in expectations regarding the Fed's interest rate cuts, with traders believing that the likelihood of two rate cuts has decreased. The probability of interest rates remaining unchanged in November or December is around 20%. Despite strong employment data being released, the market still implies a probability of over 50 basis points rate cut by the end of the year. The rise in US bond yields reflects the reasons why economic reports have not supported a significant easing of monetary policy. Investors are becoming more conservative in their expectations of the number of Fed rate cuts, with more bets on only one rate cut
On Friday, the bond market seems to be increasingly skeptical that the Federal Reserve will cut interest rates twice for the remainder of the year.
Currently, traders estimate that there is about a 20% chance that the Federal Reserve will keep rates unchanged in November or December. Even after the strong employment data released in the United States last Friday, the swap market still implies that the Fed will cut rates by more than 50 basis points by the end of the year, likely in two consecutive cuts.
US Treasury bonds fell this week. The Bloomberg US Bond Index is set to decline for the fourth consecutive week, marking its worst performance since April. The yield on the 10-year Treasury note has risen to over 4%, while the yield on the 30-year Treasury bond is at 4.41%, the highest level since July 30th.
This shift reflects a series of mixed reports on the US economy, which have failed to provide a strong rationale for the Fed to significantly ease monetary policy. Despite Fed officials' "dot plot" expectations of two more rate cuts this year, Atlanta Fed President Bostic stated this week that he would consider pausing rate cuts, while San Francisco Fed President Daly indicated that there may be one or two more rate cuts this year.
Kit Juckes of BNP Paribas in France wrote in a report:
"The market is uncertain about the outcomes of the upcoming FOMC meetings, but with the 10-year Treasury yield rising nearly 50 basis points since mid-September, the market is increasingly convinced that the US economy will not experience a 'hard landing.' This suggests an equal likelihood of 'no landing' as a 'soft landing,' raising concerns that if fiscal tightening measures do not materialize, inflation risks may reappear."
Consumer inflation data released on Thursday came in higher than expected, exacerbating signs of rising wage pressures indicated by last week's nonfarm data. However, the Producer Price Index (PPI) data released on Friday was overall more moderate.
Activity in the derivatives market indicates that investors are hedging against the possibility of fewer rate cuts by the Fed. Options demand referencing the Secured Overnight Financing Rate (SOFR) is concentrated on contracts betting that the Fed will only cut rates once more this year. In the futures market, positions betting on bond price increases have seen a wave of liquidation