Bonds drop as traders ease expectations for rate cuts

Two cuts now seen as the most likely Fed action.

Global bonds dropped and stocks posted mostly small moves as traders pared their expectations for interest-rate cuts in the face of resilient readings on the US economy.

The 10-year Treasury yield climbed closer to the key 4.5% level that some investors view as a threshold for an advance toward last year’s highs. Interest-rate swaps imply around 60 basis points of US monetary easing this year, making two cuts the most likely outcome. On Friday, the chance of a third cut was still above 50%.

For investors, it’s a busy week that includes US inflation data, a European Central Bank rate decision and the start of first-quarter earnings. Friday’s US jobs numbers exceeded expectations for a fifth straight month, reinforcing the Fed’s view of being patient about reducing rates. The next key moment for markets is Wednesday’s US consumer-price figures, projected to show further evidence of gradual cooling.

“There are indeed risks, and seeing the 10-year Treasury yield sustainably surpass 5% would indicate markets pricing in more likelihood of a hike,” Madison Faller, global investment strategist at JPMorgan Private Bank, said on Bloomberg Television. “However, as long as investors perceive a rate cut as the next move, they should be able to navigate this transition.”

S&P 500 and Nasdaq 100 futures contracts were steady following a strong close on Wall Street Friday, spurred by the latest blockbuster US labor-market figures. Mining stocks led gains in Europe after a rebound in iron ore prices, with the regional Stoxx 600 Index edging higher.

Tesla Inc. rallied as much as 4.2% in US premarket trading, set to trim some of its 34% year-to-date slump. Tesla will unveil its new robotaxi on Aug. 8, Chief Executive Officer Elon Musk said in a post on X Friday. Shares in cryptocurrency-linked companies rose as Bitcoin climbed back over the $71,000 mark as it advanced for a third session.

Oil retreated from a five-month high after Israel said it would remove some troops from Gaza. Crude has rallied recently on escalating geopolitical tensions and supply shocks, raising the prospect of prices for global benchmark Brent reaching triple figures and muddying the outlook for inflation.

“Currently, we foresee the conflict continuing without significant spillover in the next few months, but the risk remains significant, and we’re closely monitoring the situation,” Lizzy Galbraith, political economist at Abdrn Plc, said on Bloomberg TV.

The S&P 500 index and tech-heavy Nasdaq 100 both climbed more than 1% in the final session of last week as the bumper jobs report boosted optimism over US corporate earnings. The unemployment rate fell to 3.8% in March, wages grew at a solid clip, and workforce participation rose, underscoring the strength of a labor market.

“We still think that a June rate cut is likely, although the very strong payroll report last Friday makes it more debatable now,” Wei Li, global chief investment strategist at BlackRock, said on Bloomberg TV. “We are talking about a labor market that is not only tight, but also quite strong.”

After the midweek March inflation data, focus will shift to the start of the first-quarter corporate earnings season, with results due Friday from JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co.

“Right now, equity markets are very much responding to strength of the economy, as well as strength of earnings,” said BlackRock’s Li. “As long as earnings continue to hold up, the growth story and the narrative of immaculate disinflation will continue to support market sentiment.”

The ECB is likely to keep its key rate unchanged on Thursday as traders eye rate cuts within months. Economists polled by Bloomberg widely predict easing to ommence in June, though a majority expects a pause the following month. Investors currently see the chance of a second step down before the summer break at just over one-in-two.

“The expectation is for a rate cut by the Federal Reserve in June, but another high CPI print could delay this,” JPMorgan’s Faller said. “As for the ECB, no monumental actions are expected, but confirmation of rhetoric regarding rate changes starting in June would be significant.”

In Asia Monday, Japanese shares led the region higher, tracking the gains in the US. Chinese equities fell as sentiment was damped by a winding up petition for Shimao Group. The People’s Bank of China kept the yuan’s reference rate within its recent range in its daily fixing Monday in a bid to stabilize the currency after its recent slide. The decision came as China’s financial markets reopened after a two-day holiday.

In other commodities trading Monday, gold drove higher to a fresh record above $2,350 an ounce as investors shifted focus to the US inflation reading later this week, while geopolitical risks also added to its appeal.

Key events this week:

Israel rate decision, Monday
Germany industrial production, Monday
US Treasury Secretary Janet Yellen meets with PBOC Governor Pan Gongsheng, Monday
Australia consumer confidence, Tuesday
China aggregate financing, money supply, new yuan loans, Tuesday
New Zealand rate decision, Wednesday
South Korean parliamentary elections, Wednesday
Brazil CPI, Wednesday
US FOMC minutes, wholesale inventories, CPI, Wednesday
Canada rate decision, Wednesday
China PPI, CPI, Thursday
Eurozone ECB rate decision, Thursday
New York Fed President John Williams, Boston Fed President Susan Collins speak, Thursday
Japan industrial production, Friday
China trade, Friday
South Korea jobless rate, rate decision, Friday
Germany CPI, France CPI, Spain CPI, Friday
Argentina CPI, Friday
Citigroup, JPMorgan and Wells Fargo due to report results, Friday