Bond Market Sell-Off Intensifies as Traders Rethink Fed Rate Cuts
The bond market is experiencing a significant sell-off as traders reassess the likelihood of interest rate cuts from the Federal Reserve. Strong economic data and the potential for a Donald Trump victory in November have pushed bond yields higher and prices lower.
Economic Data Forces Market to Reconsider Rate Cuts
A string of hot economic data has reduced the odds of swift, steep rate cuts from the central bank. The September jobs report, which showed a stunning 254,000 jobs added, has completely erased the odds of another 50-basis-point cut. Solid retail sales, slightly hotter-than-expected inflation, and the Atlanta Fed’s prediction of third-quarter GDP growth of 3.4% have also forced markets to rethink the Fed’s eagerness to cut borrowing costs.
Fed Officials Signal Caution
Fed officials have indicated that they will move cautiously, with more rate cuts still their base case. San Francisco Fed President Mary Daly said that she hasn’t seen any information that would suggest the Fed wouldn’t continue to reduce interest rates. Other Fed officials have echoed this message, with Minneapolis Fed President Neel Kashkari expecting “modest cuts over the next quarters.”
Key Indicator to Watch: October Jobs Report
Apollo chief economist Torsten Sløk argues that the upcoming October jobs report will be a key indicator to watch. If the report shows 150 or 200,000 jobs added, it could lead to a scenario where the Fed will have to reverse course and keep interest rates unchanged.
Trump Win Could Lead to Inflationary Pressures
A potential Trump win next month is seen as being inflationary due to his proposed policy of universal tariffs. Tariffs have been the centerpiece of Trump’s economic proposals, which he insists would bring down costs, even though economists warn that taxes on imports will ultimately get passed on to consumers. A resurgence in inflation would lead to a more hawkish Fed, which could pump the brakes on rate cuts or even raise interest rates again to offset rising prices.
Market Pricing in 90% Chance of Rate Cut
Despite the changing economic landscape, the market is still pricing in a 90% chance of a 25-basis-point interest rate cut from the Fed next month. However, if the Fed does decide to keep interest rates unchanged, it would be a big surprise to traders and could lead to a significant shift in market expectations.
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