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NEW YORK – The US Treasury yield curve on Wednesday touched its steepest level since July 2022 after the Federal Reserve cut interest rates by 50 basis points, a larger-than-usual rate reduction as the central bank grappled with a weakening labor market.

The widely tracked spread between US two- and 10-year yields hit as wide as 10.2 bps and was last at 8.6 bps. A steeper curve suggests more easing is on the way.

The Fed in a statement said it has gained greater confidence that inflation is moving sustainably toward its 2% goal and that the risks between prices and employment are roughly in balance. It slashed the benchmark overnight rate to a range of 4.75% to 5%.

Before the rate decision, futures on the fed funds rate, which measures the cost of unsecured overnight loans between banks, had been betting on a 50-bp cut, even as a majority of Wall Street economists were anticipating a 25-bp move.

“I think it was fairly anticipated that, whether it was 25 or 50 basis points, what was most important was the messaging behind 50 basis points,” said Tom Hainlin, senior investment strategist, at US Bank in Minneapolis.

“And if the messaging was, ‘We’re very concerned about a potential contraction or slowdown in the economy’ … we didn’t hear that messaging. So this wasn’t necessarily some preventative medicine for something bad that was going on in the economy, but more they felt that they had the opportunity to bring rates down from a high level.”

Late in the session, US Treasury yields rose in choppy trading. The benchmark 10-year yield rose 7.1 bps to 3.713% after earlier hitting its highest in more than a week. The yield posted its best daily gain since Aug. 21.

US 30-year yields increased 7.6 bps to 4.029%, also registering its largest daily rise in about a month.

On the front end of the curve, US two-year yields advanced 4.2 bps to 3.634%.

The US central bank’s forecast, or the so-called “dots” showed rates going down to 4.375% by the end of 2024, which suggested about an additional 50-bp of easing this year. The year-end forecast for 2025 showed additional cuts of 100 bps, and a final 50 bps in 2026 to end in a 2.75%-3.00% range.

In a press conference, Fed Chair Jerome Powell noted that the central bank is in no rush to cut rates, adding that it will move as fast or as low as it thinks appropriate.

Elyse Ausenbaugh, head of investment strategy at J.P. Morgan Wealth Management, wrote in emailed comments that the decision to go big with the rate cut and Powell’s message during the press conference bolstered expectations for the soft landing scenario for the US economy.

“Did the economy need a 50-bp cut today to avoid a breakdown? We don’t think so; the labor market is slowing but not crumbling, retail sales data released earlier this week showed a resilient consumer, and the outlook for corporate earnings and profit margins looks solid.”

Following the rate decision, fed funds futures have priced in about 74 bps in cuts over the next two policy meetings, and 190 bps of cumulative easing by the end of 2025.

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Nupur Anand; Editing by Alistair Bell and Jonathan Oatis)

 

“Go big, and go bold,” was the advice to Fed Chair Jerome Powell and colleagues from some US policy watchers and even former policymakers, and didn’t they do just that.

The Federal Reserve’s half-percentage point interest rate cut on Wednesday was a statement of intent that the Fed stands ready to protect the labor market and steer the economy away from anything approaching recession.

Investors liked it, at first. The S&P 500, Dow, and gold all leaped to fresh record highs, the Russell 200 small caps index rallied nearly 2%, and the dollar fell across the board.

But stocks’ and gold’s gains melted away and the dollar bounced back from a 14-month low to close the US session up on the day.

What gives? Maybe the bond market reaction was most prescient. Treasury yields rose across the curve, more so at the longer end, perhaps on underlying worries over inflation and easier financial conditions, or because the Fed slightly revised up its long-run forecast for the fed funds rate.

This sends mixed signals for Asian markets on Thursday.

Who says central banks no longer retain the element of surprise? Bank Indonesia’s quarter-point rate cut on Wednesday was not on the cards – only three of the 33 economists polled by Reuters predicted the move, with the remaining 30 expecting the policy rate to be left at 6.25%.

Perhaps surprisingly, the rupiah didn’t move much and stuck close to its strongest levels against the dollar in about a year.

Now that the Fed has taken its first step on its easing path also, other central banks in Asia are likely to feel more comfortable loosening policy. But not Taiwan, not yet at least.

Taiwan’s central bank is expected to keep its policy interest rate unchanged on Thursday, according to all 32 economists surveyed in a Reuters poll, and stay the course until late next year as it deals with lingering inflation concerns.

The central bank left the benchmark discount rate at 2% as expected at its last quarterly meeting in June, having hiked it to that level from 1.875% at the prior meeting in March.

Investors in Asia also have New Zealand GDP, unemployment figures from Australia and Hong Kong, and trade data from Malaysia on their plate on Thursday.

Traders may also be adjusting positions ahead of Japanese inflation figures and rate decisions on Friday from the Bank of Japan and People’s Bank of China.

The dark cloud of deflation hangs heavily over China, especially the property sector. Previous housing market crashes around the world suggest it could take China a decade to recover from the bubble currently bursting. And that’s if prices even get back to their pre-bubble peaks.

Here are key developments that could provide more direction to Asian markets on Thursday:

– Taiwan interest rate decision

– New Zealand GDP (Q2)

– Australia unemployment (August)

(Reporting by Jamie McGeever)

 

NEW YORK – US Treasury yields moved lower on Friday as the possibility of a supersized interest rate cut by the Federal Reserve next week gained ground again.

Former New York Federal Reserve President Bill Dudley said on Thursday there was a strong case for a 50 basis point interest rate cut at the Fed’s Sept. 17-18 rate-setting meeting.

Market participants also mentioned news articles in the Financial Times and the Wall Street Journal, which highlighted that the size of the first cut could be a close call for Fed officials, as factors that spurred bets on a large cut.

Speculation around a larger half-percentage-point rate cut may have also been triggered by a sizeable bet on a 50 basis point cut that hit the rates futures market late on Thursday, said Spencer Hakimian, CEO of Tolou Capital Management, a New York-based macro hedge fund. After that trade, the market-implied odds that the Fed will reduce interest rates by 50 basis points jumped to 45% from 15% “in the blink of an eye,” he said.

The probability of a 50 basis point cut was last seen at 51% on Friday, up from 28% on Thursday, CME Group data showed.

Many in the market, however, remained skeptical about the need for a large rate adjustment given continued resilience in the economy and recent signals that inflation, while declining, remains somewhat sticky.

“I’m looking for the market to pull back here; I just don’t see the economic and inflation data justifying a 50 basis point rate cut,” said Tony Farren, managing director in rates sales and trading at Mischler Financial Group.

For Gennadiy Goldberg, head of US rates strategy at TD Securities, bond volatility was to be expected in the absence of fresh signals from Fed officials. Their remarks last week, before entering a so-called quiet period ahead of the September rate-setting meeting, were seen as endorsing a quarter-percentage-point reduction and leaving the door open to further and perhaps bigger moves.

“In a vacuum, you get lots and lots of volatility by definition,” said Goldberg. “We know it’s going to be a discussion, but had they wanted to send a signal that the market should be priced in for 50 basis points, they would have sent one.”

On the economic data front, Friday’s releases did not change the overall picture of a gradually slowing economy.

A release by the Labor Department’s Bureau of Labor Statistics showed on Friday that US import prices dropped by the most in eight months in August amid lower costs for fuels and food products, suggesting domestic inflation will continue to subside in the months ahead. Two-year yields declined briefly after the data.

Meanwhile, a preliminary reading of the University of Michigan’s September consumer sentiment index improved slightly, standing at 69 compared with analysts’ estimates of 68.5.

Benchmark 10-year yields were last at 3.647%, down from 3.68% on Thursday. Two-year yields, more closely linked to monetary policy expectations, declined to 3.576% from 3.648% on Thursday.

The curve comparing 10- and two-year yields, which investors look at closely for its signals on the economic outlook, widened to about 7 basis points, the steepest it has been since July 2022.

(Reporting by Davide Barbuscia; Editing by Jonathan Oatis)

 

NEW YORK – The Federal Reserve is in focus next week, as uncertainty swirls over how much the US central bank will cut interest rates at its monetary policy meeting and the pace at which it will reduce borrowing costs in coming months.

The S&P 500 index is just 1% shy of its July record high despite weeks of market swings sparked by worries over the economy and seesawing bets on the size of the cut at the Fed’s Sept. 17-18 meeting.

After fluctuating sharply throughout the week, Fed funds futures on Friday showed traders pricing an almost equal chance of a 25 basis point cut and a 50 basis point reduction, according to CME Fedwatch. The shifting bets reflect one of the key questions facing markets today: whether the Fed will head off weakening in the labor market with aggressive cuts, rather than take a slower wait-and-see approach.

“The market wants to see the Fed portray a level of confidence that growth is slowing but not falling off a cliff,” said Anthony Saglimbene, chief market strategist at Ameriprise Financial. “They want to see … that there’s still this ability to gradually normalize monetary policy.”

Investors will focus on the Fed’s fresh economic projections and interest rate outlook. Markets are pricing in 115 basis points of cuts by the end of 2024, according to LSEG data late on Friday. The Fed’s June forecast, by comparison, penciled in one 25-basis point cut for the year.

Walter Todd, chief investment officer at Greenwood Capital, said the central bank should opt for 50 basis points on Wednesday. He pointed to the gap between the 2-year Treasury yield, last around 3.6%, and the Fed funds rate of 5.25%-5.5%.

That gap is “a signal that the Fed is really tight relative to where the market is,” Todd said. “They are late in starting this cutting cycle and they need to catch up.”

Aggressive rate cut bets have helped fuel a Treasury rally, with the 10-year yield down some 80 basis points since the start of July to around 3.65%, near its lowest level since June 2023.

But if the Fed continues to project significantly less easing than the market does for this year, bonds will have to reprice, pushing yields higher, said Mike Mullaney, director of global markets research at Boston Partners.

Rising yields could pressure stock valuations, Mullaney said, which are already high relative to history. The S&P 500 was last trading at a forward price-to-earnings ratio of 21 times expected 12-month earnings, compared to its long-term average of 15.7, according to LSEG Datastream.

“I find it implausible that you’re going to get P/E multiple expansion between now and year-end in a rising (yield) environment,” Mullaney said.

With the S&P 500 up about 18% so far this year, it may not take much to disappoint investors with next week’s Fed meeting.

Focus has turned to the employment market as inflation has moderated, with job growth coming in less robust than expected in the past two monthly reports.

The unemployment rate jumped to 4.2% in August, one month after the Fed projected it reaching that level only in 2025, said Oscar Munoz, chief US macro strategist at TD Securities. That indicates the central bank may need to show it will move aggressively to bring down rates to their “neutral” level, he added.

“If the (forecast) disappoints, meaning they turn more conservative and they don’t ease as much … I think the market might not take it well,” Munoz said.

(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and Richard Chang)