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Traders Dial Back Rate Cut Bets

2 months ago

Traders adjusted their expectations for an early Federal Reserve interest-rate cut. The recent US inflation data has effectively ended the global bond rally that commenced in December, fueled by hopes of a dovish shift in Fed policy.

Market sentiment shifted as swap traders tempered their anticipation for a Fed rate cut before July, coinciding with the VIX, or the stock market’s volatility index, closing above 15 for the first time since November. Disappointment rippled through investors following the American Consumer Price Index (CPI) data release, which contradicted recent signs of easing price pressures, contributing to expectations for rate reductions in 2024.

These developments underscored the cautious stance advocated by Federal Reserve Chair Jerome Powell and echoed by other Fed officials. Swap contracts tied to Fed policy meetings, once pricing in a rate cut in May and significant easing throughout the year, faced turbulence. The probability of a May rate cut dwindled to around 32%, a sharp decline from the previous 64%, with less than 90 basis points of easing anticipated for the year.

In the commodities market, oil prices stabilized after a mixed US inventory report, while conflicting forecasts from OPEC and the International Energy Agency (IEA) added to the uncertainty surrounding the global crude market. Meanwhile, gold remained range-bound after dipping below $2,000 an ounce for the first time in two months, reflecting investor caution amid shifting market dynamics.

As investors recalibrate their expectations in response to evolving economic data and central bank communications, the trajectory of Treasury yields and market volatility will continue to be closely monitored for further insights into the direction of monetary policy and broader market sentiment.

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