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Bond Traders Adjust Rate Cut Expectations Amid Labor Market Insights

4 weeks ago

Investors in the bond market have scaled back expectations for US rate cuts in the current year, as the likelihood of a reduction in March dwindles to approximately one-in-three. The market closely interprets the Federal Open Market Committee’s (FOMC) and Chairman Powell’s medium-term guidance, a factor that can trigger volatility in asset markets, even when the probability of a policy rate move at the upcoming Jan. 31 FOMC meeting is minimal. Consequently, the US dollar exhibited strength against all Group-of-10 peers, while Treasury yields, particularly the two-year and ten-year, experienced a decline in Asian trading.

Swap contracts linked to the March Fed meeting, the subsequent one after this week, now indicate a roughly 33% chance of a 25-basis-point drop. This contrasts with late last year when a quarter-point cut in March was fully priced in, reflecting earlier expectations of a slowdown in the labor market that have yet to materialize.

Recent data revealing an unexpected rise in US job openings in December, reaching the highest level in three months, has set the stage for a series of releases offering insights into the labor market’s status. A Wednesday report is anticipated to signal a moderation in employment costs at the close of 2023. Additionally, the government’s jobs report on Friday is projected to indicate the addition of around 185,000 positions in January.

In other market developments, oil is poised for its first monthly gain since September. Escalating attacks on ships in the Red Sea have prompted a diversion of tanker traffic, sparking concerns of a broader conflict in the Middle East.