The current market sentiment suggests that the Federal Reserve is unlikely to cut interest rates twice this year, owing to a robust end to the year in terms of employment figures. Recently released data show the unemployment rate dipping to 4.1% from 4.2%, with the economy adding 256,000 jobs, surpassing the expected 160,000.
Analyzing market predictions, it appears there is only a 46% chance of a rate cut in May, adjusting the range to between 4.00% and 4.25%. The prospect of the first fully-confirmed rate reduction has now been postponed to September, with 31 basis points in easing priced in, compared to 35 basis points anticipated before the data was released.
There’s a concern over the interplay between the economy and the bond market. U.S. 30-year yields have reached 5%, potentially pushing 30-year fixed mortgage rates past 7%. Aside from a brief two-month period at the end of 2023, these rates represent the highest long-term levels we’ve seen since before the financial crisis.
In essence, the real economy has effectively experienced a rate hike since September, rather than an anticipated 100 basis points easing. This development is likely to slow down economic activities as we move further into the year, possibly leading to a cooling of equity markets ahead of that.
