Fresh Data Dampens Rate Cut Bets

STOCK INDEX FUTURES

Stock index futures are lower following the release of a slate of data, which tempered expectations of rate cuts from the Fed. Revised second quarter GDP figures showed that GDP increased at an annual rate of 3.8%, higher than the previous revision of 3.3%. The increase in GDP in the second quarter primarily reflects an upward revision to consumer spending that was partly offset by a downward revision to exports. Imports decreased less than in the previous estimate. Revisions to first quarter data revealed that GDP shrank 0.6%, a downward revision of 0.1% point from the previously published estimate, reflecting downward revisions to investment, government spending, and exports. Imports were revised up. The data, although backwards looking, signals that the economy is performing well and may buy the Fed some time in keeping rates higher while it tries to tame inflation.

Weekly initial jobless claims came in below expectations, with 218,000 new claims vs. an expected 233,000, causing the four-week moving average to fall from 240,250 to 237,500. Durable goods orders increased 2.9% in August, well above forecasts of a 0.3% decline in orders.

Looking ahead, August existing home sales are due later in the morning while PCE inflation data for August out tomorrow will be the key focus for investors in trying to gauge the extent of easing the economy could see by year end. The University of Michigan’s final consumer survey for September is also out on Friday and will round out the week.

CURRENCY FUTURES

The USD index is higher following the better-than-expected release of revised Q2 GDP figures and weekly jobless claims, which caused traders to scale back bets on interest rate cuts out of the Fed. Q2 GDP was revised 0.5% higher, attributable to an increase in consumer spending while weekly jobless claims came in 15,000 claims below expected at 218,000 new claims. Fed Funds futures now show a 81% chance of a rate cut in October, down from 92% at this time yesterday. Tomorrow will offer PCE inflation data for August, a key focus for investors as markets continue to gauge the extent to which tariffs have elevated inflation. A hot reading could lead markets to scale back expectations of easing from the Fed even further, while data in-line with expectations or below will help bolster the case for a rate cut in October.

Euro futures are lower on a stronger dollar. Germany’s GfK Consumer Climate Indicator edged up to -22.3 heading into October from a marginally revised -23.5 in September, surpassing market expectations of -23.3. However, economic expectations fell, marking the third straight drop over concerns of stagnant growth. Meanwhile, German business sentiment declined in September from last month. Companies polled were less satisfied with current conditions and gloomier about their outlook, with both manufacturing and services seeing a deterioration. This follows Tuesday’s release of PMI figures in Germany, where growth in the services sector helped offset an unexpected decline in manufacturing activity, resulting in net expansion of private sector activity. For the eurozone as a whole, private sector activity expanded this month. Composite PMI rose to 51.2 from 51.0 in August, hitting its highest level in 16 months. Growth was carried by the services sector, which helped offset an unexpected contraction in manufacturing activity.  Eurozone companies expressed their least optimistic outlook in four months, with sentiment hitting its lowest this year in the factory sector.

British pound futures edged lower in overnight trade as a stronger dollar weighed on the sterling following the release of US economic data that dented some bets of rate cuts from the Fed. Markets continue to weigh concerns about the UK’s finances as finance minister Rachel Reeves is expected to raise taxes in her November budget, a move that could weigh on growth in the economy. UK borrowing costs have climbed faster than in Germany or the US, leaving Reeves with little fiscal headroom. Recent gilt auctions underscore the strain: demand for 5-, 9-, and 30-year bonds slumped to multi-year lows, as investors doubted Reeves’ ability to balance spending plans with fiscal rules. Bank of England Policymaker Megan Greene on Wednesday said that inflation in the country will prove stronger than what the central bank has forecast, requiring the bank to maintain a cautious approach to further rate cuts. The BoE’s chief Economist Huw Pill, one of the Monetary Policy Committee members who has been most concerned about inflation, said on Tuesday that he was more comfortable with the outlook for price pressures in Britain than he was earlier this year. Markets are not pricing any rate cuts until March. Private sector activity in the UK recorded the slowest pace of growth since May per new PMI figures. The drag on growth was driven by a sharp slowdown in services and manufacturing activity, reflecting waning client demand and rising wage-related cost pressures. Firms raised prices in the services sector, while manufacturing prices declined, highlighting diverging inflationary dynamics. Business sentiment weakened among service providers amid economic uncertainty, while manufacturers remained cautiously optimistic due to increased investment. Employment fell for the 11th consecutive month, pointing to softening labor market conditions and downside risks economic growth ahead of expected tax increases come November.

Japanese yen futures are lower, pressured by a stronger dollar. Meeting minutes from the Bank of Japan showed that policymakers remain focused on trying to raise interest rates if economic and price conditions develop as expected. The board judged that Japan’s economy has recovered moderately despite areas of weakness. Private consumption was supported by improving employment and income, though sentiment softened while exports and industrial output remained subdued. September PMI data out of Japan showed that services sector activity expanded at a slower pace than in August while manufacturing remained in contractionary territory landing a composite PMI reading of 51.1. Employment expanded at its slowest pace in two years. Input prices rose sharply, resulting in output price inflation accelerating, with both manufacturers and service providers raising prices. Inflation data due tomorrow is expected to show that consumer inflation excluding fresh food prices in the Tokyo metropolitan area rose 2.8% in September from a year earlier, according to a poll of economists by data provider Quick. That would follow a 2.5% increase in August and may bolster expectations that underlying price pressures remain sticky.

Australian dollar futures are lower, erasing earlier gains as a stronger dollar pressured the Aussie. Investors continue to scale back expectations for interest rate cuts in Australia following hotter than expected monthly inflation data. CPI inflation figures from Wednesday showed that prices rose 3% year-over-year in August from July’s figure of 2.80%, marking the highest reading since July 2024. Inflation was primarily driven by housing costs, with housing inflation rising 4.5% from 3.6% in July. However, the annual trimmed mean inflation (which strips out volatile price movements) eased slightly to 2.6% in August from 2.7% in July. However, policymakers at the RBA prefer to look past the monthly series in favor of quarterly figures. Governor Michele Bullock signaled on Monday that inflation is on track to remain on target, sending signals that the bank is in no urgency to cut rates. PMI figures showed a slowdown in growth in September marking the lowest reading in three months, albeit recording a twelfth-straight month of expansion in private sector activity. Output growth eased across both manufacturing and services, input prices remained elevated, while selling price inflation eased to a three-month low due to softer services output prices and strong competition keeping prices lower. Business confidence fell to its lowest level in a year while employment continued to rise.

INTEREST RATE MARKET FUTURES

Futures are lower across the curve following the release of better-than-expected Q2 GDP data, which saw GDP revised 0.5% higher while weekly initial jobless claims came in below expectations. The data release resulted in traders scaling back bets of Fed rate cuts in October and December. Markets now pricing an 81% chance of a rate cut in October, down from 92% at this time yesterday, while odds of a December rate cut fell from 73% to 59% according to Federal Funds futures.

Yields rose across the board Wednesday as a flood of corporate and government bonds hit the market, including a $18 billion six-part senior note package from Oracle. Including that deal, September supply will top well over $178 billion, a record recorded in September of last year. Yields have drifted higher over the last two sessions signaling that the market is leaning into hawkish comments out of Fed officials, including Chair Powell, who reiterated caution regarding the outlook for interest rates following last week’s rate cut.

Wednesday’s $70 billion 5-year note auction results were sloppy with non-aggressive bidding and below-average non-dealer demand. The auction fetched a bid-to-cover ratio of 2.34, below the six-auction average of 2.36 while indirect bids took home 59.4% of the take, below the 60.5% average. Direct bids totaled 28.6%, below their average of 30.7%, leaving dealers with an above average take of 11.94% vs. an 8.8% average. The results follow Tuesday’s 2-year note auction  where results were on par with recent averages. The Treasury will auction $44 billion in seven-year notes today.

The spread between the two- and 10-year yields fell to 53 bps from 54.6 bps on Wednesday while the 2-year yield, which reflects interest rate expectations rose to 3.65%.

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