JPMorgan Chase & Co. and Citigroup Inc. are among the few banks that still expect the Federal Reserve to ease monetary policy next month. Swap rates show traders have all but ruled out a rate cut in July and now expect rates to remain steady until November.
However, the case for an earlier rate cut has become stronger in recent days, driving global bonds to their longest winning streak since December.
Friday’s monthly nonfarm payrolls, the last major data release before the Federal Reserve meets next week to set new interest rate forecasts for the second half of the year, could determine whether swap traders or holdouts are closer to the mark.
“The only thing that would shift people back toward a July cut would be news of a materially weaker labor market,” said Greg Wilensky, head of U.S. fixed income at Janus Henderson Investors. “If we get data that’s in line with the consensus, I think you’d see people calling for a July cut again.”
At the beginning of the year, the market generally expected the Fed to cut interest rates at least six times this year, and derivative contracts were priced accordingly. However, progress in reducing inflation has stalled and the labor market remains strong, which has weakened the case for rate cuts. Most other banks abandoned their forecasts of Fed rate cuts before September weeks or even months ago. However, in the past week, weak employment and private sector payrolls data have raised the market's estimate that the Fed will start cutting interest rates before December, and as early as September.
For the May non-farm employment report, the median forecast of economists surveyed by foreign media was that there would be 185,000 new non-farm jobs, a slight increase from 175,000 in April, but the lowest value in the past year.
Citigroup's forecast for a July rate cut -- the first of four this year -- "depends on weaker labor market data, including Friday," Citigroup chief U.S. economist Andrew Hollenhorst said Wednesday. His team expects nonfarm payrolls to increase by 140,000 and the unemployment rate to rise to 4% from 3.9%.
Hollenhorst said the Fed's rate-setting committee, which meets next week for June, is unlikely to signal its intentions for July regardless of May's jobs data. He said Fed Chairman Jerome Powell "will make it clear that rate cuts are a possibility at all meetings." He will also likely emphasize that the committee is watching the data and will make decisions based on what happens at each meeting.
Still, Fed policymakers could revise their quarterly rate forecasts, which in March had a median forecast of three rate cuts by the end of the year.
In late May, economists at Goldman Sachs Group Inc. and Nomura Securities Co. lowered their forecasts for when the Fed would start cutting interest rates to September from July, in part because comments from Fed officials suggested the bar for easing had been raised. For example, Fed Governor Waller said on May 21 that "several months" of good inflation data were needed.
JPMorgan economists maintained their July rate cut forecast based on the fact that April inflation readings, while still above the Fed's expectations, were at least moving in the right direction, Michael Feroli, chief U.S. economist at JPMorgan, and his colleagues said in a May 15 report.
“But we would probably need to see a further cooling in labor market activity for this to occur,” they said. JPMorgan estimates payrolls will increase by 150,000 in May.
Expectations for the Fed are crucial to the performance of the bond market, and as expectations of rate cuts collapsed, Treasury yields reached their highest point so far this year in late April. The two-year Treasury yield is more sensitive to Fed rate changes than longer-term Treasury yields, peaking at more than 5% before falling back to around 4.7%.
"If the companies capitulate on a July rate cut, that would mean the total number of rate cuts we could get in 2024 would continue to shrink," said James Athey, portfolio manager at Marlborough Investment Management Ltd. But Athey expects labor market conditions to weaken and inflation to slow further, benefiting bonds this year.
"There's an inflection point when job growth is lower than the growth of the labor force," he said.
The article is forwarded from: Jinshi Data
