June Fed Rate-Cut Odds Dip Below 50% After Strong ISM Data

In a Bloomberg news article by Michael Mackenzie, bond traders have recently adjusted their expectations for monetary-policy easing by the Federal Reserve in 2024, signaling less optimism for substantial rate cuts. This adjustment was sparked by a report indicating that U.S. manufacturing activity expanded for the first time since 2022, with the ISM Manufacturing Index exceeding predictions at 50.3. This positive economic indicator led to a drop in the likelihood of a Fed rate cut in June to below 50%, with the total anticipated rate cuts for the year now less than what the Federal Reserve itself had forecasted.

The bond market reacted to the ISM data with a significant selloff, lifting Treasury yields across the board and marking one of their largest daily increases this year. This shift in sentiment was influenced not only by the robust ISM report but also by cautious comments from Fed Chair Jerome Powell and strong personal income and spending data for February, indicating ongoing consumption strength and a stalled progress towards lower inflation.

Fed officials, including Governor Christopher Waller, have hinted at the possibility of delaying or reducing the extent of rate cuts previously anticipated for this year, citing recent economic data. This perspective suggests a more patient approach to adjusting rates, aiming for a clearer trend towards lower inflation and considering the strong labor market conditions.

In the background, the U.S. economy shows signs of resilience, with robust corporate bond offerings indicating that interest rates are not hindering U.S. companies, and the price of crude oil reaching its highest level since November, hinting at economic strength.

Investor opinions, like those of Mark Mobius, suggest that some still anticipate a rate cut by the Fed in June, although market sentiment and recent economic indicators seem to paint a more complex picture of the future monetary policy direction.

For commercial real estate investors, this information underscores the importance of closely monitoring Fed actions and economic indicators. The bond market’s response to these developments indicates a more cautious outlook on rate cuts, which could affect interest rates and borrowing costs. In light of this, investors may need to adjust their strategies accordingly, staying attuned to economic trends and Fed policy shifts that could influence market conditions and investment opportunities.

Our take (from the Straight to Smart newsletter):

Dueling Job Narratives

Article Excerpt:

Bond traders priced in less monetary-policy easing by the Federal Reserve this year — and briefly set the odds of a first move in June below 50% — after a gauge of US manufacturing activity showed expansion for the first time since 2022.

The amount of Fed rate cuts priced into swap contracts for this year dropped to fewer than 65 basis points — less than Fed policymakers themselves have forecast — after a report on ISM manufacturing for March exceeded all estimates in Bloomberg’s survey of economists. A bond-market decline lifted two- to 30-year Treasury yields roughly 10 or more basis points on the day, among their biggest daily increases this year.

Click to read original article (may need a Bloomberg subscription): June Fed Rate-Cut Odds

More by VettaFi about the ISM Report: ISM Services PMI Expands

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