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market commentary from deVere Group.
The Federal Reserve will likely cut US interest rates in December but
leave them on hold this month following today’s hot US jobs report,
predicts the CEO of global financial advisory giant
deVere Group.
The analysis from Nigel Green comes as US nonfarm payrolls surged by
172,000 in May, more than double expectations and one of the strongest
monthly jobs gains of the year. The unemployment rate held steady at
4.3%.
Financial markets moved rapidly to reprice the outlook. According to
CME FedWatch, US interest-rate futures lifted the probability of a
December rate cut to 63% from 48% before the release, while
expectations of any June move effectively disappeared.
Nigel Green says: “Markets have spent months searching for a reason
for the Federal Reserve to cut rates. Today’s jobs report gave
policymakers a reason not to do so.
“One report does not make policy, but a report of this magnitude
changes probabilities. And markets have recognised that immediately.
“The repricing after the release tells the story. Investors moved
rapidly away from expectations of a near-term cut because the economic
data simply does not support it.”
Investors have consistently underestimated the strength of the US
economy and overestimated the urgency for lower rates.
“The market has repeatedly priced a rate-cutting cycle that the
economic data has failed to justify.
“Employment remains strong. Consumer spending remains resilient.
Growth continues to outperform forecasts. Every time investors become
convinced the economy is slowing sharply, the data seems to point
somewhere else.”
The CEO argues that today’s figures strengthen the Fed’s ability to
remain patient as it continues its battle against inflation.
“A labour market creating 172,000 jobs while unemployment remains at
4.3% does not force policymakers into action. It gives them room to
wait, assess incoming inflation data and avoid moving prematurely.”
Bond markets reflected that reality immediately, with Treasury yields
moving higher as traders pushed expectations for easing further into
the future.
The US dollar also strengthened as investors reassessed the likely
path of monetary policy.
“In my view, the biggest risk to markets is no longer that the economy
suddenly weakens, it’s that investors continue underestimating the
economy’s resilience and continue expecting rate cuts that the data
does not yet justify.”
Nigel Green says the jobs report marks another setback for those
expecting an aggressive easing cycle.
“Markets are finally beginning to accept a reality that has been
building for months.
“The Fed seems to be winning its inflation fight without breaking the
labour market.”
Nigel Green concludes: “December remains the most likely window for
the next rate cut.
“Markets have spent too long asking how quickly rates can come down.
“Following this report, the more important question is how long the US
economy can continue performing this strongly while rates remain where
they are.”
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