Following the manufacturing data, traders on Wall Street briefly trimmed bets on the first cut to rates coming as soon as June. That’s still a “reasonable baseline” expectation, according to Deutsche Bank economists, but they say tough talk from Fed officials recently could hint at interest rates staying higher for longer than earlier thought.
The Fed has hiked its main rate to the highest level since 2001 in order to slow the economy and hurt investment prices enough to get inflation under control. Expectations for coming cuts have been a major reason the S&P 500 soared more than 20 per cent from October through March.
This week will offer several economic reports that could sway the Fed’s thinking, including updates on job openings across the country and the strength of US services businesses. The headliner arrives on Friday, when economists expect a report to show that hiring cooled a bit last month.
A slowdown would be welcome on Wall Street, where the hope is that the economy remains solid but not so strong that it pushes inflation higher. Inflation is milder than it was at its peak nearly two years ago. But progress has become bumpier recently, with reports this year coming in hotter than expected.
Fed Chair Jerome Powell said again on Friday that the central bank is waiting to get “more good inflation readings” before cutting interest rates this year. It’s been sticking with an outlook for three cuts to rates in 2024.
On Friday, a report said inflation is behaving as expected, at least by the measure that the Federal Reserve prefers to use. Both the US bond and stock markets were closed that day.
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Wall Street traders now largely see three cuts as the likeliest possibility this year, after earlier forecasting more, but some bets shaded toward the possibility of fewer cuts following the morning’s better-than-expected data on manufacturing.
In the bond market, the yield on the 10-year Treasury jumped to 4.31 per cent from 4.21 per cent late Thursday. The two-year yield, which more closely tracks expectations for the Fed, climbed to 4.71 per cent from 4.63 per cent.
In stock markets abroad, Tokyo’s Nikkei 225 fell 1.4 per cent after a Bank of Japan quarterly survey on business conditions showed sentiment among large manufacturers declined for the first time in a year.
In China, stocks gained 1.2 per cent in Shanghai after surveys suggested the country’s manufacturing industry is strengthening.
In Europe, stock markets were closed for a holiday.
AP
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