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Despite mixed economic data, bonds remained flat over the week, with emerging market bonds outperforming, driven by Chinese stimulus measures.
Last week, the Federal Reserve kicked off its rate-cut cycle with a bold 50 bps reduction, signaling that monetary policy had grown too restrictive given the progress on inflation and the normalization of the job market.
This week, all eyes are on the Federal Reserve as they prepare to potentially initiate their first rate cut after a prolonged period of holding rates at peak levels. With a near 50/50 split in market expectations for either a 25 or 50 bps cut, this decision could set the tone for the economic outlook moving forward.
A string of disappointing labor market data last week spooked investors, pushing them toward bonds. The U.S. yield curve is now positive, while the 10-year Treasury yield has hit a one-year low.
August closed on a positive note for fixed income, with U.S. Treasuries averaging a +1.5% gain, as markets reacted to a moderating job market and the prospect of the Fed's anticipated rate cuts.
The bond market surged this week, driven by growing expectations of an imminent rate cut from the Federal Reserve. With yields dropping across the curve, investors are positioning for a more accommodative monetary policy as the Fed shifts its focus towards stabilizing growth and managing a cooling job market
After months where inflation dominated market movements, bond markets now seem less reactive to inflation data, turning their attention instead to labor market trends, upcoming elections, and geopolitical uncertainties. This shift could indicate a broader rebalancing of market drivers in the months ahead.
After a weaker-than-expected U.S. jobs report earlier this month, Japan's market crisis initially boosted bonds, suggesting a return to safety. However, yields corrected later in the week as reassuring news from Japan and a rebound in equities tempered the bond rally.
The summer seems sweet for bond market which just received a welcome boost from the latest US CPI released below expectations. The market is now priced more than 90% chance to get a rate cut in September.
With job market challenges potentially hastening Federal Reserve rate cuts before the elections, and looming expansive fiscal promises exerting pressure on long-term yields, the stage is set for significant movements in the US bond landscape.
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