(Bloomberg) — Fifteen minutes after the April employment report hit early Friday, President Donald Trump seized on the surprisingly strong job growth to ratchet up his pressure on Federal Reserve Chair Jerome Powell, saying there was no reason to hold off on cutting interest rates.
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Bond traders came to the exact opposite conclusion.
The pace of hiring — as well as a manufacturing report on Thursday that wasn’t as downbeat as expected — drove traders to dial back rate-cut bets that had steadily mounted as Trump’s trade war unleashed havoc in financial markets and sowed fears of a US recession.
After piling into short-term Treasuries, anticipating the Fed would start easing policy as soon as next month to contain the fallout, they reversed course. Two-year yields shot up, staging the biggest two-day jump since October, and futures traders started pricing in what Fed officials have been consistently trying to drive home — that they will remain in wait-and-see mode until there’s more evidence that the economy has turned.
“With inflation being above the Fed’s target, tariffs which can move prices higher and a still solid labor market, I think the Fed is unlikely to do anything,” said Priya Misra, portfolio manager at JPMorgan Asset Management. “But they are data dependent and the data could turn weaker by the time the Fed meets mid-June.”
The latest data underscored the vexing reality that has whipsawed markets ever since Trump stepped up his US-against-the-world trade war a month ago, triggering the type of volatility that hadn’t been seen since the pandemic or the 2008 credit crisis as his pauses, threats, and overtures to negotiations made it virtually impossible to forecast how it will all play out.
It is almost certain to eventually slow the US economy as businesses supply chains are upended, consumer confidence tumbles, and the tariff increases that are in place deliver at least a temporary inflation shock. Yet with the outcome in limbo and much of the impact yet to be felt, the economy — through last month, at least — has remained resilient enough to send the S&P 500 Index rebounding back to where it was before Trump’s April 2 tariff rollout.
“Data right now is fine, and the Fed likes to move slowly,” said Ed Al-Hussainy, rates strategist at Columbia Threadneedle. “That leaves the rate-cut expectations vulnerable.”
Futures contracts are now pricing in that the Fed is likely to hold its benchmark rate steady until July or September, after earlier last week putting strong odds on a rate cut as soon as the June meeting. After the jobs data was released Friday, economists at Goldman Sachs Group Inc. and Barclays Plc both pushed back their forecast for the next cut to July from June.
What Bloomberg strategists say…
“The market is pricing for the Federal Reserve to cut rates to under 3% by the middle of next year as the market factors in a slowing economy. … As the last several years have suggested, however, the US economy may be more resilient than the market and professional forecasters expect. However, we concur with the market that there’s a major risk of a stagflationary type environment of very slow real growth and inflation remaining sticky, above 3% on a core PCE deflator basis.” -Ira Jersey, chief US interest-rate Strategist at Bloomberg Intelligence
Trump has repeatedly lashed out at Powell for keeping rates steady since December. The president stepped up his attacks on the Fed chief when markets tumbled last month by asserting he had the power to fire him, stoking concerns he’d seek to challenge the central bank’s political independence and undermine its inflation-fighting credibility.
While he backed off that threat after stock prices swooned, his administration has continued to pressure the Fed to ease policy. Treasury Secretary Scott Bessent last week pointed to the previous drop in two-year Treasury yields as a sign that the market was signaling the Fed wasn’t lowering rates fast enough.
In a social media post Friday, where Trump flagged flagged the employment data, he said the Fed’s inflation fears are misplaced. But Powell and other policymakers, who were once blindsided by how much consumer prices surged after the pandemic, have consistently emphasized they are in no rush to react as inflation continues to hold above their 2% target.
Leading up to this week’s rate announcement on Wednesday, Powell and his colleagues emphasized the central bank must ensure any price hikes from Trump’s tariffs don’t lead to another continued rise in consumer prices. But they’ve also been clear that they would step in if the economy deteriorates.
That risk has continued to leave bond investors betting that the Fed will wind up being more aggressive than indicated by its most recent forecasts, which showed policymakers anticipated two quarter-point rate cuts this year. With Trump’s trade policies darkening the outlook since then, though, futures are pricing in three such moves through the end of the year.
“Bond investors are concerned about the trajectory of the economy in coming months,” said Subadra Rajappa, a fixed-income strategist at Societe Generale. “The market’s thought process is that the Fed will hold as long as they can — and when they cut, they have to cut aggressively.”
What to Watch
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Economic data:
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May 5: S&P Global US services, composite PMI (final reading); ISM services
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May 6: Trade balance
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May 7: MBA mortgage applications; consumer credit
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May 8: Non-farm productivity; unit labor costs; initial jobless claims; wholesale trade sales and inventories; New York Fed one-year inflation expectations
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Fed calendar:
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May. 7: FOMC rate decision
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May 9: New York Fed President John Williams; Fed Governor Adriana Kugler; Chicago Fed President Austan Goolsbee; Fed Governor Christopher Waller; St. Louis Fed President Alberto Musalem; Cleveland’s Beth Hammack; Fed Governor Lisa Cook
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Auction calendar:
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May. 5: 13-, 26-week bills; three-year notes
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May 6: 6-week bills; 10-year notes
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May 7: 17-week bills
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May 8: 4-, 8-week bills; 30-year bonds
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