U.S. bonds plummeted, the dollar soared! After an overnight period, the Federal Reserve cut interest rates in June?

Finance Associated Press, April 2 (edited by Xiaoxiang) When the U.S. ISM manufacturing PMI returned to the top of the 50 boom and bust watershed after a year and a half, how did Wall Street change?

The answer is: the probability of a Fed rate cut in June fell below 50% overnight. At the same time, U.S. Treasuries plunged, the dollar soared, and gold quickly moved off its all-time highs set during Monday's Asian session......

On April 1, April Fool's Day, the US economic data seems to have played a big "joke" on investors in the global financial market!

U.S. manufacturing activity expanded for the first time in a year and a half

Can you imagine that the U.S. manufacturing sector is getting better about six months after the Fed's benchmark interest rate is at the peak of its rate hike cycle this week? Monday's data seems to be proof that nothing is impossible – U.S. manufacturing activity expanded for the first time since September 2022 in March, thanks to a sharp rebound in production and strong demand.

Data released by the Institute for Supply Management (ISM) on Monday showed that the U.S. ISM manufacturing PMI index rose 2.5 points to 50.3 in March. While this is just past the 50-year mark, it is still monumental for the U.S. manufacturing sector – ending a 16-month streak of contraction. People saw this in advance before the Fed cut interest rates.

In comparison with market expectations, the index is higher than the expectations of all economists surveyed by the media (median forecast is only 48.4).

In terms of sub-indicators, the output index rebounded sharply by 6.2 month-on-month to 54.6, the largest increase since mid-2020. The new orders index returned to expansion territory after contracting in February. The employment index also rose to 47.4 in March from 45.9 in February.

Timothy Fiore, chair of the ISM Manufacturing Business Inquiry Committee, said in a statement that "U.S. demand is still in the early stages of recovery and there are clear signs of improvement." ”。

Recently, executives in the U.S. procurement and supply management departments have expressed optimism about the outlook for the manufacturing industry. The further growth in manufacturing orders highlights the resilience of consumer demand and business investment, indicating that companies have made great strides in driving inventory and sales trends in alignment.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said the manufacturing PMI showed a further encouraging improvement in U.S. business conditions in March, suggesting that the U.S. economy appears to be expanding at a solid pace again in the first quarter. A key development in recent months has been the expansion of the economic upturn from the services sector to the manufacturing sector, with the recovery in demand for goods driving the fastest growth in factory output since May 2022. Job growth also picked up as companies ramped up production capacity to meet demand. The increase in capital expenditure also boosted orders for machinery and equipment, further indicating that companies are confident in the outlook.

The Federal Reserve cut interest rates in June?

Treasury yields, which mainly reflect investors' expectations for the Fed's short-term interest rates, extended gains in the previous session after the ISM report, while Treasury prices plunged. The yield on the benchmark 10-year Treasury note climbed to the top of the 2024 range to settle at 4.314%, up from 4.192% last Thursday before the long weekend holiday.

By the end of the New York session, the 2-year Treasury yield was up 7.7 basis points at 4.714%, the 3-year Treasury yield was up 9.2 basis points at 4.512%, the 5-year Treasury yield was up 10.1 basis points at 4.322%, the 10-year Treasury yield was up 10.7 basis points at 4.314%, and the 30-year Treasury yield was up 9.6 basis points at 4.448%. It was also one of the biggest one-day gains in mid- and long-term Treasury yields so far this year.

Gregory Faranello, head of U.S. interest rate trading and strategy at AmeriVet Securities, said the ISM data provided further support for the market's view last week, and the resilience of the economy gave the Fed room to be patient. For the bond market, this means that interest rates will remain high for a longer period of time.

In addition to the rapid rise in U.S. Treasury yields, the overnight foreign exchange market was also not small. The ICE U.S. Dollar Index, which measures the greenback against a basket of six currencies, rose all the way above the 105 mark, and USDJPY approached the 152 mark again.

Many industry insiders now see the 152 mark as a "red line" that could trigger the BOJ's intervention. Japanese Finance Minister Jun Suzuki said again on Monday that he would not rule out any option to deal with excessive fluctuations in the exchange rate and would take appropriate countermeasures, reiterating his warning about the rapid movement of the yen.

Eugene Epstein, Head of North American Structuring at Moneycorp, noted, "The ISM data is really leading the market, and it shows that inflation is not all the way down, and I think the market has reacted quite a bit to that." ”

In the precious metals market, spot gold prices also gave up early gains in the Asian session during the overnight European and American sessions, trading near $2,250 at the end of the New York session, well away from the all-time high of $2,265 hit earlier in the day.

Looking at the pricing of the interest rate swap market, overnight traders once expected that the probability of the Fed starting to cut interest rates in June was less than 50%. In addition, the market expects the Fed to cut interest rates by less than 65 basis points this year, which is also lower than the Fed officials' own interest rate dot plot projections of three rate cuts this year.

At the beginning of the year, market forecasts for a rate cut in 2024 were above 150 basis points, as the US economy was expected to slow sharply after 11 rate hikes over the past two years. However, economic growth data has generally exceeded expectations, and the downward trend in inflation is slowing.

Helen Given, a foreign exchange trader at Monex USA, said, "Combined with last Friday's PCE data, I don't think this will still lead to a material change in the Fed's forecasts, but the market is once again starting to fine-tune its expectations for the frequency and timing of rate cuts this year, gradually becoming more in line with the Fed's forecasts." ”

Looking ahead to this week, at least 13 out of 19 Fed officials will speak, and investors will be expected to have a clearer picture of what the Fed is thinking. In addition, the monthly US non-farm payrolls report will be released on Friday, which is also expected to further influence investors' judgment on the Fed's path of interest rate cuts.

(Finance Associated Press Xiaoxiang)