After a strong jobs report, Wall Street expects a smaller rate cut from the Fed in July
- The US economy added 224,000 jobs in June, more than economists expected.
- The Friday jobs report was a positive economic data point showing that the longest economic expansion is still running.
- The stock market slid after the report, and traders lowered their expectations for a half-percentage-point cut in interest rates from the Federal Reserve this month.
- Read more on Markets Insider.
Now, it's less likely that the Federal Reserve will lower interest rates in July by as much as the market had hoped to stimulate an economy that appears to be running just fine on its own.
Traders are still pricing in a 100% probability of a rate cut in July, but by less than previously expected. The CME's FedWatch tool showed Friday that expectations for the Fed to lower its benchmark rate by 50 basis points fell to 9% from 29%. However, the market is still pricing in a 25-basis-point rate cut — expectations rose to 91% from 70.8%.
"Not only was the number strong enough to take a 50bp rate cut off the table, but it was also just high enough to add a shadow of doubt to a July cut as well," wrote Scott Buchta, the head of fixed income strategy at Brean Capital, in a note.
The better-than-expected jobs number came after both debt and equity markets priced in multiple rate cuts by the Federal Reserve through the end of the year. The bond market has been screaming for a rate cut for some time — a bond rally sent yields on 10-year Treasurys below 2% before Friday's report. In addition, the S&P 500 had soared to new highs on speculation that the Fed will lower rates, which would give the market even more steam to run.
Market action after the jobs report suggested that confidence in a Fed cut had faded.
Safe-haven assets, which investors flock to during times of volatility or when it looks like riskier assets such as stocks are going to slide, fell on the positive jobs data. As Treasurys sold off, the 10-year yield rose above 2% and the 2-year climbed to 1.88%. Gold fell once again below $1400, a key psychological price point for the precious metal. The dollar rose against every other G10 currency and upward momentum could continue, wrote Lukman Otunuga of FXTM in a Friday note.
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"The employment picture continues to be one of the positives to the US economy," said Ryan Detrick, senior market strategist for LPL Financial. "Services and manufacturing are both slowing, but the good news is we don't see a recession on the horizon and continued strong jobs data is one of the main reasons."
To be sure, not all economists think that the Fed should move rates lower at all in July.
"The economy does not need the Fed to ease, but the market continues to scream for action on July 31," wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics.
Still, he thinks that a Fed cut is on the table as the jobs report alone isn't enough to keep the Fed from easing.
"This Fed won't disappoint unless the data between now and then are so clear that market expectations shift substantially. That's entirely possible, but don't bet on it," he wrote.
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