Market Extra: Disappointing U.S. data has bond traders considering possible half-point Fed rate hike in September

by | Aug 23, 2022 | Stock Market

In the blink of an eye on Tuesday, the U.S. bond market’s focus shifted back toward fears of an unexpectedly sharp economic slowdown and away from persistently high inflation over the bulk of the trading day.That sentiment shift occurred after data showed U.S. new home sales plunged in July to the lowest level in more than six years. Gauges of the manufacturing and service sectors also came in below expectations, reinforcing similar weakness seen in the eurozone. For much of Tuesday, traders priced in a better-than-not chance of a 50-basis-point interest rate hike by Federal Reserve policy makers in September, which would lift the fed funds rate target to between 2.75% and 3% — pulling back from Monday’s expectations for a bigger 75-basis-point hike next month. But when all the dust settled, fed funds futures traders were on the fence again, pricing in a roughly 50-50 chance of either a 50 or 75 basis point hike. Financial markets have been caught between two narratives — one of troublingly elevated inflation that forces policy makers to keep aggressively raising borrowing costs, the other of an economic slowdown that resolves the inflation problem and prompts the Fed to pivot. Both of these narratives could add up anyway to something that looks and feels like the worst of all worlds: stagflation. “The data is weakening and the market is considering a Fed pivot” in the form of a half-point hike in September, said trader Tom di Galoma of Seaport Global Holdings in Greenwich, Connecticut. “I don’t see a pivot, but the market is starting to see one.”“We’re starting to go into a real slowdown in the housing market, which overall is not good for the economy just becaus …

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