US government bonds have rallied strongly, reflecting market expectations that the Federal Reserve will implement three interest rate cuts in 2024. This movement comes on the back of economic data that indicates a cooling labor market, bolstering the case for monetary easing by the Fed.
Economic Data Drives Market Sentiment
The 10-year Treasury yield fell below 4% for the first time since February, spurred by data from a manufacturing gauge and jobless claims suggesting a softening US labor market. This decline in yield underscores bond traders’ anticipation of Fed rate cuts, with swaps traders fully pricing in 75 basis points worth of easing by the end of the year. This expectation translates to a quarter-point reduction at each of the Fed’s three remaining policy meetings in 2024.
Federal Reserve Chair Jerome Powell, in a recent news conference, indicated that a rate cut “could be on the table” at the next meeting on September 18, depending on the economy’s performance in the interim. Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities, noted that while three cuts might seem optimistic, any weak data could further support the current price action and increase bets on a half-point cut in September.
Treasury Market Performance and Fed Outlook
Treasury debt returned 2.2% in July, marking its best monthly performance since December. This rally was bolstered by the Fed’s policy statement and Powell’s comments, which highlighted progress towards lower inflation and the risks to the labor market from maintaining high-interest rates. The US unemployment rate, which exceeded 4% in May for the first time since 2021, is expected to stay at that level, but any increase could trigger significant market reactions.
Subadra Rajappa, head of US rates strategy at Societe Generale, emphasized that an increase in the unemployment rate would “send out a lot of alarm bells.” The Treasury market’s current positioning reflects expectations of a substantial easing cycle, but strong employment data could cause a reversal, prompting a rise in rates as bullish bets are scaled back.
Market Sentiment and Rate Cut Projections
At the start of the year, the bond market had priced in at least six quarter-point cuts for 2024, following the Fed’s rate hike to 5.25%-5.5% last July. A temporary halt in inflation’s decline caused a rebound in yields, pushing the two-year Treasury yield past 5% and the 10-year yield to around 4.75% by late April.
Ian Lyngen, head of US rates strategy at BMO Capital Markets, commented that market pricing reflects growing concerns that the Fed might need to cut rates more quickly than the expected 25-basis-point quarterly cadence due to mounting economic headwinds. While a half-point cut in September is considered unlikely unless payrolls contract or core consumer prices drop significantly, the bond market is currently pricing in 200 basis points of easing by the end of 2025.
Greg Peters, co-chief investment officer at PGIM Fixed Income, warned that such an extent of Fed accommodation would be excessive without a substantial economic downturn. “You need to see a real rollover in the economy for that to come to fruition,” Peters stated.
Conclusion: Anticipating Fed Actions
As traders and analysts monitor upcoming economic data, the market sentiment leans towards significant Fed rate cuts in 2024 to address the cooling labor market and other economic challenges. The Fed’s decisions in the coming months will be crucial in shaping market expectations and guiding future monetary policy.
Investors will closely watch the broader US employment data and other economic indicators to gauge the likelihood of the anticipated rate cuts and their potential impact on the bond market and overall economy.
This article provides an analysis of the current market expectations for Fed rate cuts in 2024, focusing on key economic data and insights from industry experts. The focus keyword “Fed rate cuts 2024” has been integrated into the title, headings, and body paragraphs to optimize search engine visibility.
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