What’s priced in for the Federal Reserve after non-farm payrolls

The market doesn’t think the Federal Reserve will cut rates twice this year in light of a strong finish to the year for jobs. The unemployment rate fell to 4.1% from 4.2% and the economy added 256K jobs compared to 160K expected.

Market pricing now shows that a May rate cut to a range of 4.00-4.25% is now less-likely than a hold, with the probability at 46%. The first fully-priced cut isn’t until September and there 31 bps in easing priced in compared to 35 bps pre-data.

What I worry about is that there is some reflexivity between the economy and the bond market. US 30-year yields hit 5% on this, which will push US 30-year fixed mortgage rates above 7%. Aside from a two-month period in late 2023, these are the highest long-term rates since before the financial crisis.

In that sense, the real economy has faced a de facto hike since September rather than the 100 basis points in easing since September. That will cool activity later this year and could also cool equity markets before that.

This article was written by Adam Button at www.forexlive.com.