Speculative bets on interest rates have experienced intense movements driven by the latest U.S. economic data, which reveal uncertainties about the resilience of the world’s largest economy.
Last week, the unemployment rate unexpectedly increased from 4.1% to 4.3% in July, reaching its highest level since October 2021, while the pace of job additions slowed significantly, falling short of economic estimates. These cooling labor market indicators exacerbated fears of a manufacturing contraction, as reflected in the latest ISM Manufacturing PMI for July.
The Federal Reserve had already hinted at a potential rate cut, with Chairman Jerome Powell stating, “I would think that a rate cut could be on the table at the September meeting.”
When recession concerns permeate the markets, traders tend to increase their bets on interest rate cuts. By Monday morning, interest rate futures had fully priced in a 50-basis-point rate cut in September. Chicago Fed President Austan Goolsbee did not rule out the possibility of an intra-meeting rate cut, where the Fed moves interest rates ahead of a scheduled meeting.
However, the euphoria surrounding interest rate cuts was tempered when a stronger-than-expected ISM Services PMI pushed back against recession fears.
"Another strong expansion of business activity in the service sector, which over the past two months has enjoyed its best growth spell for over two years, contrasts with the deteriorating picture seen in the manufacturing sector, where output came close to stalling in July," said Chris Williamson, chief business economist at S&P Global Market Intelligence.
“The increase in the composite index in July is a result of an average increase of 5 percentage points for the Business Activity, New Orders, and Employment indexes, offset by the 4.6-point drop in the Supplier Deliveries Index,” Steve Miller, chair of the ISM Services Business Survey Committee, said.
Where Do Interest Rate Expectations Stand Now?
As of the close of the U.S. markets on Monday, expectations for interest rate changes at the upcoming Federal Reserve meetings, as indicated by Fed funds futures, are as follows:
For the September meeting, there is an 84.5% probability of a 50-basis-point rate cut and a 15.5% chance of a smaller 25-basis-point cut.
Just a week ago, the probability of a 50-basis-point rate cut in September was significantly lower, at only 11.4%.
| Rate-cut event | Now* | 1 Day Ago | 1 Week Ago July 29, 2024 |
| 50bp to 4.75-5% | 84.5% | 74% | 11.4% |
| 25bp to 5-5.25% | 15.5% | 26% | 88.2% |
Looking ahead to the November meeting, the market sees a 45.2% likelihood of an additional 50-basis-point rate cut, a 47.6% probability of a 25-basis-point cut, and a 7.2% chance that rates will remain at 4.75-5%.
| Now* | 1 Day Ago | 1 Week ago July 29, 2024 | |
| 4.25-4.5% | 45.2% | 49.8% | 0.2% |
| 4.5-4.75% | 47.6% | 41.7% | 7.0% |
| 4.75-5% | 7.2% | 8.5% | 57.5% |
| 5-5.25% | 0.0% | 0.0% | 35.2% |
| 5.25-5.5% (Current) | 0.0% | 0.0% | 0.0% |
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© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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