(Bloomberg) — Bond traders reduced bets on Federal Reserve interest-rate cuts in 2024, with the odds of a move in March falling to about one-in-three, after a report on US job openings highlighted strength in the labor market.
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Traders also marked down the odds of a Fed rate cut in May and priced in less monetary easing over the course of the year. Confidence in rate cuts reached the lowest point since the last policy meeting in mid-December. The Fed’s rate-setting committee concludes a two-day meeting on Wednesday at which no change is expected, however its statement and subsequent comments by Chair Jerome Powell may affect the outlook for interest rates.
Tuesday’s report on December job openings exceeded all estimates in a Bloomberg survey of economists. Vacancies increased to 9 million from an upwardly revised 8.9 million in November, the Bureau of Labor Statistics Job Openings and Labor Turnover Survey, known as JOLTS, showed.
Read more: US Job Openings Rise to Three-Month High But Fewer Workers Quit
The data “reduces pressure on the Fed to begin the normalization process of the balance sheet and rates,” said Priya Misra, portfolio manager at JPMorgan Investment Management. “The Fed will continue to buy time and not commit to any easing just yet.”
Swap contracts referencing the March Fed meeting date — the next one after this week’s — traded at around 5.25%, about 8 basis points lower than the effective policy rate of 5.33%, pricing in about a third of a 25-basis-point drop. Late last year, a quarter-point cut in March was completely priced in for a time, reflecting expectations for labor-market cooling that have failed to materialize.
The December contract prices in about 130 basis points of easing, down from a peak of about 175 basis points this month.
Treasury yields rose in the wake of the JOLTS data, led by the short-maturity tenors that are most sensitive to Fed shifts. The two-year erased a drop of more than 3 basis points and rose as much as 6 basis points at 4.38%.
The two-year yield fell as low as 4.12% this month following the release of supportive inflation data on Jan. 12. It has mostly remained below 4.40% since the December Fed meeting, when policy makers signaled their intention to pivot to cutting rates this year.
Wednesday’s communications from the central bank may address the persistent gap between the amount of easing the market has priced in and the smaller amount — about 75 basis points — anticipated by the Fed’s forecast.
Policy makers’ comments suggest “there will be room for the Fed to cut rates this year, but it’s not going to happen as soon as the market is pricing,” said Greg Whitely, portfolio manager government securities at DoubleLine. “Our thinking is that the Fed’s going to be cautious about cutting rates.”
–With assistance from Edward Bolingbroke.
(Adds investor comment, updates yield levels)
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