Key Takeaways:
- Anticipation of a June rate cut in the bond market dropped below 50% following strong factory data, according to Bloomberg.
- ISM manufacturing data showed expansion on Monday, the first in 16 months.
- Inflation aligns with Fed hopes, creating a “wait and see” situation for rate cuts, a former Fed official said.
Bond-market expectations of a rate cut in June experienced a notable setback on Monday, driven by the release of fresh factory data that pushed the odds of a rate cut below the 50% mark, according to data compiled by Bloomberg.
The Institute for Supply Management (ISM) manufacturing index delivered a surprise to analysts and investors alike by surpassing expectations. It revealed an expansion in manufacturing activity for the first time since 2022, marking a significant turnaround from 16 consecutive months of contraction. This uptick was propelled by a sharp increase in both production and new orders, signaling resilience and vigor in the industrial sector. The robust performance of the manufacturing index serves as yet another testament to the enduring strength of the U.S. economy, prompting speculation about the necessity of immediate policy adjustments by the central bank.
The release of the ISM report triggered a sharp upward movement in long-dated Treasury yields, marking one of the most substantial daily increases seen this year. Both the 10- and 30-year rates surged by approximately 13 basis points, reflecting a swift reevaluation by bond traders who scaled back their expectations of imminent rate cuts. This sudden shift in sentiment precipitated a sell-off in the bond market as investors recalibrated their outlook on monetary policy.
In line with these developments, swaps contracts suggest that the trajectory of monetary policy may entail a reduction of less than 65 basis points over the course of the year, a figure notably lower than what the Federal Reserve itself had projected. Similarly, data from the CME Fedwatch Tool indicates a waning confidence among investors regarding the likelihood of rate cuts materializing by June. Just two weeks prior, a majority of investors, approximately 60%, had anticipated a rate cut in that month. However, the current sentiment reveals a more cautious stance, with less than 57% of investors expecting such a move.
Despite the market’s skepticism, the Federal Reserve remains steadfast in its conviction regarding the feasibility of rate cuts. Chairman Jerome Powell underscored the central bank’s confidence, particularly in light of the recent personal consumption expenditures report, which indicated an annual inflation increase of 2.5%. While this figure aligns with the Fed’s expectations, Powell emphasized that the robust state of the economy provides little impetus for precipitous rate cuts.
Former Vice Chairman Roger Ferguson echoed this sentiment during an interview with CNBC, highlighting the current environment as one of cautious observation. While acknowledging that inflation has slightly exceeded expectations in recent months, Ferguson emphasized the need for a nuanced approach, suggesting that the Fed’s decision-making process will be guided by evolving economic data and market conditions. Thus, the prevailing sentiment among policymakers appears to be one of prudence and vigilance, as they navigate the intricacies of monetary policy in an environment characterized by both resilience and uncertainty.