Treasuries advanced and the dollar declined after recent US economic data left investors uncertain about the Federal Reserve’s upcoming rate cut. The two-year Treasury yield fell by six basis points, while the dollar retreated 0.3%, marking its third consecutive day of decline. The Stoxx 600 Index increased by 0.5%, with Danish stocks reaching a record high for the first time since November 2021. US futures indicated modest gains.
Fed Rate Cut Uncertainty
Market participants remain divided on the extent of the Federal Reserve’s anticipated policy easing at its meeting next week. The uncertainty follows data released Thursday showing a slight increase in the US producer price index for August, coupled with a revision of previous month’s figures. Additionally, a rise in unemployment benefit claims has heightened concerns about a weakening labor market.
Diverging Opinions on Rate Cuts
Evercore Chairman Emeritus Ralph Schlosstein expressed his opinion on Bloomberg TV, advocating for a 50 basis-point rate cut rather than the widely expected 25 basis points. He suggested that the risk of rising unemployment now outweighs the risk of persistent inflation. “The balance of risks has shifted from a risk that inflation doesn’t come down as we hope, to a risk that unemployment grows faster than we would hope,” Schlosstein stated.
Market Expectations for Rate Cuts
Traders are currently anticipating a 33 basis-point cut from the Fed on September 18, up from 31 basis points on Thursday and 26 basis points earlier in the week. Former New York Fed President William Dudley, who is also a Bloomberg Opinion columnist and Bretton Woods Committee chair, supported the call for a 50 basis-point cut. “I think there’s a strong case for 50,” Dudley said during a Friday interview in Singapore. “I know what I’d be pushing for.”
Focus on Labor Market
The recent wholesale inflation data followed the consumer price index report, which showed that underlying inflation accelerated in August. Despite this, policymakers are currently concentrating on the softness in the labor market, which is likely to influence future policy discussions.
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