AI picture
The market does not believe the Federal Reserve will cut rates twice this year due to a strong finish to the year for jobs. The unemployment rate fell to 4.1% from 4.2% and the economy added 256K jobs compared to the 160K expected.
Market prices now show that a rate cut in May to a range of 4.00-4.25% is now less likely to hold, with the probability at 46%. The first full price cut is not until September and there is a 31 bps discount compared to 35 bps pre-data.
What worries me is that there is some reflexivity between the economy and the bond market. The US 30-year yield hit 5% on this, which pushed US 30-year fixed mortgage rates above 7%. Apart from two months at the end of 2023, these are the highest long-term rates since the financial crisis.
In that sense, the real economy has de facto contradicted itself to walk from September rather than the 100 basis points in discount from September. That will cool activity later this year and may also cool equity markets before then.
