It has been rather an eventful week in terms of financial markets and economics as investors try to come to terms with a different looking situation. But a side-effect has been rather a quantum shift in bond markets and expected interest-rates. We looked at one feature of that yesterday in Japan where the Bank of Japan was guiding people towards a doubling of its official interest-rate to 1% and now it is a case of definitely maybe. As ever the leader of this particular pack is the US Federal Reserve which now finds itself mulling this situation.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2025 is -2.8 percent on April 3, up from -3.7 percent on April 1. The alternative model forecast, which adjusts for imports and exports of gold as described here, is -0.8 percent. ( Atlanta Fed)
The estimate as you can see is a little volatile and we have non-farm payrolls at lunchtime but as more information has been added we see the headline regularly suggesting a -0.7% GDP drop as we would record it. Sadly when you most want a reliable number you are least likely to get it and the movements in Gold are something which cloud the issue. But we can note that the estimate including that is -0.2% as we would record it. Let me add that the likely pre tariff rise in goods imports is another factor as whilst students are taught imports are a subtraction from GDP the initial numbers will use the Output version where it is an implied rather than explicit factor. So things might change later when the Expenditure version is clearer. Or as they put it in the TV series Soap.
Confused You will be….
But the underlying theme here is of an expected weaker economy and we can now apply what that is expected to do to interest-rates.
Traders, however, ramped up their bets that the Fed will act to boost growth rather than fight inflation.
As is often the reaction during a market wipeout like Thursday’s, the market raised the implied odds that the Fed will cut aggressively this year, going so far as to put the equivalent of four quarter-percentage-point reductions in play, according to the CME Group’s FedWatch tracker of futures pricing. ( CNBC)
It feels as though we have been living a version of The Beatles song 8 Days A Week as it was only Monday I was pointing out that the Federal Reserve was set to be a brake on interest-rate cuts for the UK. The change in views has come in spite of these words from Federal Reserve Vice-Chair Jefferson yesterday.
In my view, there is no need to be in a hurry to make further policy rate adjustments. The current policy stance is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate.
Is it? If you choose inflation as your objective then it looks too low and if you choose output it looks too high.
If the economy remains strong and inflation does not continue to move sustainably toward 2 percent, the current policy restraint could be retained for longer. If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, policy could be eased accordingly.
Market minds were perhaps focused on the latte part as they observed this release.
U.S.-based employers announced 275,240 job cuts in March, a 60% increase from the 172,017 cuts announced one month prior. It is up 205% from the 90,309 cuts announced in the same month in 2024, which was the highest monthly total recorded last year, according to a report released Thursday from global outplacement and business and executive coaching firm Challenger, Gray & Christmas, Inc.
Although rather than outright economic weakness it was government cutbacks driving this.
Over the last two months, DOGE actions have been attributed to 280,253 layoff plans of federal workers and contractors impacting 27 agencies, according to Challenger tracking. Another 4,429 job cuts have come from the downstream effect of cutting federal aid or ending contracts, impacting mostly Non-Profits and Health organizations.
US Bond Yields
Here we have seen quite a change with concerns over ever rising debt costs being reduced by the US ten-year yield falling below 4% overnight. So we have a three big figure at 3.95%. Here is the Federal Reserve Vice-Chair again.
Short-term interest rates and central bank communication, in turn, affect long-term interest rates through investors’ expectations. According to the expectations theory of the term structure of interest rates, intermediate- and long-term interest rates are the weighted average of expected future short-term interest rates.
Not such a good week for such an explanation. But we can already seen a real world economic impact.
Mortgage rates fell sharply Thursday following the Trump administration’s tariff announcement.
The average rate on the popular 30-year fixed loan plunged 12 basis points to 6.63%, according to Mortgage News Daily. That put it at the lowest level since October. ( CNBC)
It is not clear to me that a 0.12% decline is a “plunge” but those looking for a US mortgage are seeing some cheaper interest-rates.
The Equity Market
I am adding this in because there has been much debate over the years about the US Federal Reserve providing an equity market put option. Or if you prefer has an alter ego as The Plunge Protection Team.
It will therefore be concerned about this.
US markets all closed lower on Thursday – the Dow Jones fell nearly 4%, the S&P 500 dropped close to 5%, and the tech-heavy Nasdaq slid nearly 6%. Those are big moves. ( BBC News)
But I am not expecting any emergency interest-rate cut as I think that would be a too obvious abandonment of the inflation target.
Bank of England
Here things have changed too.
UK RATE FUTURES PRICE IN ABOUT 74 BPS OF BANK OF ENGLAND RATE CUTS OVER REST OF 2025 (THURSDAY 64.7 BPS) ( @PiQSuite)
So an extra cut of 0.25% since Monday. Also there is a little relief for the government and Bank of England as the ten-year yield has dipped below 4.5%. Should that be the situation on Monday it will be especially welcome as it plans to sell some £750 million of its medium dated QE holdings so will lose less money than it has recently become used to.
ECB
The ECB was already in a cutting phase and more is now expected from it.
Traders now see a quarter-point rate cut from the ECB later this month, alongside two more reductions widely expected before 2025 ends. ( Reuters)
Or if you prefer.
GERMANY’S 2-YEAR GOVERNMENT BOND YIELD DE2YT=RR DROPS TO LOWEST SINCE EARLY NOVEMBER 2022, LAST DOWN 7.8 BPS TO 1.853%. ( @PiQSuite)
Comment
There have been quite a few other effects from this as we have seen Safe Haven rallies for the Euro and especially the Japanese Yen in spite of the interest-rate path being lower. At that point markets were focusing more on the new likely path for US interest-rates.
Let me finish with some humour from Japan.
“The BOJ’s preference is to keep raising interest rates steadily and reduce its massive balance sheet. But it faces a difficult trade-off as Trump’s tariffs will almost certainly hit the economy hard,” he told Reuters, adding a hike to 1% may take until well towards the end of Ueda’s term in 2028. ( Former BOJ board member Makoto Sakurai)