– Bond-market expectations of a June rate cut fell below 50% after strong factory data
– ISM manufacturing data showed an expansion for the first time in 16 months
– Inflation is in line with Fed hopes, creating a “wait and see” situation for rate cuts
Bond-market expectations for a rate cut in June dropped below 50% after strong factory data was released on Monday, according to Bloomberg. The ISM manufacturing data showed expansion for the first time in 16 months, signaling the country’s economic strength. Inflation remains in line with the Federal Reserve’s hopes, creating a “wait and see” situation for potential rate cuts, as mentioned by a former Fed official.
Following the ISM report, long-dated Treasury yields experienced a substantial increase, with the 10- and 30-year rates rising about 13 basis points. The market sell-off was triggered as bond traders became less optimistic about the possibility of rate cuts. Swaps contracts suggest that monetary policy is expected to drop less than 65 basis points this year, which is below the Fed’s own projections. Data from the CME Fedwatch Tool indicates that investor confidence in a June rate cut is also diminishing, with less than 57% expecting the Fed to cut rates by then.
Despite the market’s shifting expectations, the Fed remains confident in its ability to achieve rate cuts. Inflation metrics align with the central bank’s goals, with an annual increase of 2.5%. While Federal Reserve Chairman Jerome Powell acknowledges the higher inflation, he believes the strong economy does not necessitate rushing rate cuts. Former Vice Chairman Roger Ferguson also emphasized the importance of monitoring the data before making any decisions on rate cuts.