Summary
Investors are again recalibrating their expectations around the Federal Reserve’s long-awaited interest rate cuts. After hotter-than-expected jobs market data surprised investors on Friday, Treasury yields spiked and bond futures markets pared back their expectations for policy easing. Bond traders now see a roughly equal chance that rates hold steady or the Fed lowers the funds rate for the first time in this cycle at its September meeting.
Morningstar chief US economist Preston Caldwell is anticipating two rate cuts beginning in September. Ed Clissold, chief US strategist at Ned Davis Research, has reached a similar conclusion. Falling interest rates tend to be a headwind for bonds, whose prices rise as their yields fall.
On the other hand, growth slowing too much could cause problems for stocks. “The stock market would perform poorly if these higher restrictive rates start taking a more sudden bite of economic activity,” Saglimbene says. The resulting uncertainty around the path of monetary policy could also weigh on asset prices.
