(Bloomberg) — US Treasuries posted small gains as traders turned the page on a highly-anticipated interest-rate cut, with focus back on the state of the labor market.
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Yields slipped across maturities, with shorter tenors outperforming, sending the two-year yield three basis points lower to 3.59%. Treasuries ended the previous day lower in whipsaw trading after the Federal Reserve delivered a half-point cut, ending weeks of debate over the size of its first move and wrong-footing most Wall Street economists.
While Fed Chair Jerome Powell framed the decision as a “recalibration” of policy, market wagers on the pace and extent of further easing this year and beyond barely shifted. Money markets favor three quarter-point moves by year-end and see around two percentage points of cuts through next year. That’s more than the Fed’s dot plot, which only points to another 50 basis points of easing this year.
“It now will be a battle between market expectations and the Fed, with employment data — not inflation data — determining which side is right,” said Jack McIntyre, portfolio manager at Brandywine Global. “Since this policy move was mostly telegraphed, there is no outsized move in financial markets. Now, everyone is back to data dependency.”
Another big reduction hinges on the US labor market getting weaker, according to JPMorgan Chase & Co., the one Wall Street titan whose economists correctly called the size of this week’s cut. They still expect a second straight half-point move come November. Goldman Sachs Group Inc. revised its forecasts to see a faster pace of cuts, and said the choice between a quarter- or half-point reduction next is “a close call.”
The Fed decision continued to ripple through global markets Thursday. A gauge of the dollar reversed Wednesday’s move to slip 0.4%, with Norway’s krone leading gains after its central bank bucked the Fed’s easing drive to hold pat. The yen fell as the Bank of Japan started its two-day meeting, with economists unanimous there won’t be a policy change.
It’s been a hectic week for central bank meetings. The Bank of England is up next at midday in London, where policymakers are also expected to hold its key rate at 5%. The pound gained, holding near a two-year high, and short-maturity gilts tracked Treasuries modestly higher.
After the BOE, traders will turn to US employment data. Powell said the Fed cut, larger than the 25 basis points many market participants had expected, would help limit the chances of a downturn while the US economy is still strong, adding he did not think policymakers were too late to act.
“For now, the Fed can afford to humor financial markets,” said Naomi Fink, Nikko Asset Management’s chief global strategist. “Wherever ‘neutral’ rates sit, they are lower than where we are now, allowing some additional room for the Fed to cut rates in the name of normalization, rather than outright stimulus. But the market appears to be keener on rate cuts than the Fed itself.”
Fed officials updated quarterly economic forecasts to raise their median projection for unemployment at the end of 2024 to 4.4%, from the 4% seen in June. Powell said last month that further cooling in the labor market would be “unwelcome.”
“Yesterday’s move was a surprise and could be positive for markets in the near term, but we think it raises the prospects of further volatility ahead, especially if growth and inflation don’t pan out in line with the soft landing in the Fed’s updated projections,” said Jean Boivin, head of the BlackRock Investment Institute.
(Updates throughout, adds additional quote.)
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