US unemployment benefits data from last week fell for the first time in three weeks as the labour market showed signs of strength. The number of Americans filing for their first unemployment benefits dropped by 9,000. That reduction will cause the Federal Reserve to consider pausing the interest rate cut anticipated by the financial markets. The likelihood of the first rate cut occurring in March has now decreased, according to the CME FedWatch Tool
Rate Cut Timeline Adjustments Shake Markets
This sudden change in the rate cut timetable expectations has impacted treasury yields, with the yield on two-year Treasuries, which is sensitive to interest rate expectations, rising to 4.62%. The increase in borrowing costs, in turn, has caused bond prices to fall and led to a decline in interest rate futures.
Richmond Federal Reserve Bank President Thomas Barkin said that the central bank needs to take more time to evaluate inflation before it considers cutting rates. He pointed out the US economy’s resilience and stated that there is no immediate risk of a recession, meaning the Fed has time to ensure inflation is moving towards its target.
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The adjustment in rate cut expectations has affected markets across the globe. Traders now expect the Reserve Bank of Australia to implement only one rate cut this year when they previously expected two. Sustained higher US rates are also likely to limit the ability of central banks in emerging markets to ease monetary policy, especially those that had raised rates to protect their currencies against a stronger dollar. Vishnu Varathan, chief economist for Asia ex-Japan at Mizuho Bank, said,
The greater the delay, the more likely that US dollar assertions and yield volatility will intensify FX risks and policy conundrum for EM Asia FX,
