Fed-funds Futures Suggest Doubts Over June Rate Cuts as Inflation Data Looms

Traders active in the federal-funds-futures market are displaying hesitancy regarding the possibility of the Federal Reserve initiating interest rate cuts in June, with uncertainty prevailing ahead of an imminent inflation report.

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According to data sourced from the CME FedWatch Tool, Fed-funds futures currently indicate a 51.2% likelihood of the U.S. central bank implementing a quarter-percentage-point reduction in its benchmark rate come June. This probability has slightly increased from earlier Monday when it stood at less than 50%. Conversely, traders now perceive nearly a 48% chance of the Fed maintaining its policy rate within the existing target range of 5.25% to 5.5%.

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Market participants are eagerly awaiting the release of the March consumer-price index (CPI) report scheduled for Wednesday, a highly anticipated event that could potentially propel the S&P 500 index to new heights or prolong the downturn experienced by the U.S. stock market last week, as highlighted in a Sevens Report Research note on Monday.

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Despite a notable decline from its peak in 2022, concerns persist among investors regarding the persistence of inflation at levels that might deter the Fed from pivoting towards rate cuts in its monetary policy.

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Paul Christopher, head of global investment strategy at Wells Fargo Investment Institute, expressed skepticism regarding the likelihood of inflation receding swiftly enough to prompt a shift in the Fed's stance, particularly in light of the robustness of the labor market. This sentiment was echoed following the release of the U.S. jobs report, which revealed a creation of 303,000 jobs in March, surpassing economists' forecasts.

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Attention has also been drawn to wage growth as a potential precursor to inflationary pressures. Average hourly earnings saw a modest increase of 0.3% in March, bringing the year-over-year growth to 4.1%, consistent with expectations and a slowdown from the previous period. This deceleration in wage growth has been ongoing, averaging a decrease of 0.08 percentage points per month over the past 24 months, according to DataTrek Research.

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Despite the Fed's efforts to keep interest rates elevated in order to temper inflation towards its 2% target, Christopher maintains that disinflation remains the prevailing trend in the U.S. However, the prolonged persistence of inflation at higher levels than anticipated by the market could lead to frustration among investors.

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In the equities market, indices were on the rise during Monday morning trading, with the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all registering gains, according to FactSet data. Conversely, in the bond market, the yield on the 10-year Treasury note experienced an increase of approximately four basis points.

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Nicholas Colas, co-founder of DataTrek, emphasized that the gradual decline in wage growth serves as a pivotal factor prompting the market to reassess the timing and extent of potential Fed rate cuts over the next year. Colas anticipates that the first rate cut may materialize in July, barring any significant surprises in inflation readings.

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