The Fed Will Not Raise Rates Anytime Soon

#Fed #interest #NFPs #economy #GDP #VirusCasedemic

Have a healthy weekend, Keep the Faith!

Friday’s NFPs was a rude awakening“– Paul Ebeling

US investors who had been betting the Fed would raise rates as early as the end of next yr abruptly reversed from those positions Friday after a disappointing April NFPs report and now see the earliest the Fed might tighten 2 maybe 3 yrs away.

The push back in expectations for when the Fed might start raising rates also means any reduction in the pace of its bond buying that will happen 1st may also occur later than some investors had been betting.

April’s employment growth came in far short of expectations, probably restrained by a shortage of workers and raw materials even as demand improved rapidly.

It would be hard to argue as Mr. Biden is doing, that it stands as substantial further progress toward maximum employment, the test the Fed has said it must achieve before it begins dialing back its massive support for the economy.

Following April’s meeting, investors were betting the Fed would raise rates in late Y 2022 or early Y 2023 and would offer clues about tapering its $120-B in monthly asset purchases as soon as June 2021.

Friday, US interest rate futures showed that traders pushed out expectations of a rate hike by roughly 3 months after Friday morning’s payrolls report.

Eurodollar futures, a proxy for interest rate expectations, showed a 90% chance of an interest rate hike in March 2023, and fully priced in a hike in June 2023. Prior to the report, investors were betting there was a 90% chance of a hike in December 2022, and a 100% chance in March 2023. We have always said nothing till Y 2023.

The change in interest rate expectations brings the market more in line with the Fed’s Dovish approach to the VirusCasedemic recovery. Though economic data has been improving, the Fed has said it has no plans to raise rates until maximum employment is achieved.

The Fed is looking for maximum employment. It says it will take quite a while to get there. Friday’s data reinforces that outlook, although a lack of strong GDP growth does not appear to be behind the big disappointment

Note: Last wk speculators piled into bearish bets on Treasury prices, on the expectation of a stellar payrolls print, they were wrong!

Commodity Futures Trading Commission data released Friday showed that speculative positioning in US 10-yr Treasury futures flipped from a net long of 55,759 contracts to a net short of minus 7,245 contracts in the wk through 4 May.

Shorter-dated Treasury yields, which move with expectations of interest rates, fell in the wake of the report. The 2-yr T-Note yield fell to its lowest mark since March, before recovering a bit last down 1 bpts to 0.147%.

Yields at the long end of the Treasury curve initially fell following the report, but recovered. The benchmark 10-yr T-Note yield after hitting the lowest mark since 4 March retraced the move to last trade at 1.579%, flat on the day.

Have a healthy weekend, Keep the Faith!