(Bloomberg) — Traders’ conviction on three quarter-point interest-rate cuts from the Federal Reserve this year is quickly dissipating, with markets now favoring just two reductions.
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Interest-rate swaps imply around 60 basis points of US monetary easing this year, which means two cuts is the most likely outcome with the first expected by September, according to Bloomberg pricing. On Friday, the chance of a third cut was still above 50%.
While US swaps trading can be less liquid in European hours, markets have been tempering bets on Fed cuts for days. US economic data remains resilient and Fed officials have pushed back against the need for easing, with some even stressing a risk of hikes should progress on inflation stall. Earlier this year, swaps priced six such reductions in 2024.
“The focus on the timing of a possible rate cut is being further undermined by the data, and the Fed appears to be looking for the appropriate response if inflation dynamics do not weaken further or even accelerate again,” said Rainer Guntermann, a strategist at Commerzbank. “Following Friday’s surprisingly strong payrolls report and the hawkish Fed comments over the weekend, Wednesday’s US inflation data will be crucial.”
Treasuries fell on Monday along with major peers, sending the two-year yield up two basis points to 4.77%.
At the start of the year, expectations were widespread that the Fed’s 11 rate increases in the past two years would not only curb inflation but also cause economic stress. Instead, progress toward lower inflation has slowed, growth metrics have remained robust, and investors continue to shovel money into stocks and corporate bonds at a pace that suggests the economy doesn’t yet require lower rates.
–With assistance from Liz Capo McCormick.
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