Government bond yields have declined as investors anticipate interest rate cuts by major central banks in the coming year. This includes a 5.4 basis point drop in the ten-year German bund yields, the European benchmark, which now stands at 2.305%, its lowest level since June. This shift in sentiment follows remarks made by Isabel Schnabel, a European Central Bank board member, who has not ruled out the possibility of interest rate cuts next year.
Recent data from Bloomberg indicates that traders are now pricing in 150 basis points of cuts by the European Central Bank in 2024, a significant increase from the previous estimate of just 75 basis points a few weeks ago. It is worth noting that the European Central Bank's main deposit rate is currently at a record high of 4%. However, inflation rates have dropped from last year's peak of over 10% to 2.4%, which is just above the central bank's target rate of 2%.
This shift in the European Central Bank's thinking is aligned with expectations for a similar change in stance by its U.S. counterpart. Market forecasts indicate a 99.9% probability that the Federal Reserve will hold interest rates steady at a range of 5.25% to 5.50% at its next meeting on December 13th. Additionally, there is an 86% chance that they will maintain the same rates in January. However, there is a growing expectation of at least a 25 basis point rate cut at the subsequent meeting in March, with a probability of 62%, up from 25.5% a month ago.
Easing Policy Hopes Rely on Latest US Jobs Data
Investors eagerly await a series of US jobs data due this week, hoping for further evidence that the labor market is cooling. This information would support the expectation of easier monetary policy in the coming months and aid the Federal Reserve in its ongoing battle against inflationary pressures.
The schedule includes the release of the JOLTS (job openings) report on Tuesday, followed by the ADP survey of private sector hiring on Wednesday, the weekly unemployment claims data on Thursday, and finally, the nonfarm payrolls report on Friday.
Alongside these reports, other economic updates for Tuesday include the S&P services purchasing managers' index for November at 9:45 a.m. and the ISM services for November report at 10 a.m.
Unpredictability looms as experts predict that upcoming soft job data may solidify the expectations of a Fed rate cut, while robust data could introduce uncertainty and market volatility. It's important to note that last month's strikes had a negative impact on the US jobs market. However, the current month's data could potentially unveil a positive outcome, blurring the visibility of its true health.
As per Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, the financial markets currently reflect an anticipated 125 basis points of cuts from the Federal Reserve next year. This projection significantly contrasts with the Fed's own outlook on rates by the end of next year. Thus, there may be an element of overstretched Fed optimism.
In conclusion, this week's US jobs data holds immense importance, as it has the potential to shape future monetary policy decisions. Investors and analysts will be closely watching these reports for any indications of a cooling labor market and its impact on inflationary pressures.