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Wall Street expects the Federal Reserve to raise interest rates in June. Not only that, he finally believes the central bank when it says it won’t cut rates this year.
what happened? Two key economic data came in hotter than expected last week, raising investors’ doubts about what the Fed’s rate hike will look like.
- Gross domestic product, the broadest measure of economic output, rose at an annualized rate of 1.3% in the first three months of the year, up from an initial estimate of 1.1% in April.
- The price index for personal consumption expenditures rose 4.4% in the 12 months to April, compared with a 4.2% increase in March, data from the Commerce Department showed.
The economic data — coupled with recent calm in the regional banking sector since the collapse of the Republic earlier this month, investors are betting the Fed will hike next month, said Mark Heppenstall, chief investment officer at Penn Mutual Asset Management.
According to the CME FedWatch Tool, futures traders expect roughly 66% odds of a quarter point in June as of Friday afternoon. This marks the central bank’s 11th consecutive rate hike.
Perhaps more surprising, markets don’t believe the Fed will cut rates in 2023. That’s a stark about-face even earlier this month, when Wall Street expected the central bank to cut rates several times this year, starting this summer.
Good news: Although a strong economy gives the Fed more leeway to raise inflation, it also means the United States is resilient to the central bank’s aggressive campaign to tame inflation.
Of course, economic strength is nothing new. Some investors who had previously been anticipating a recession have seen more signs that the economy may be slipping into Goldilocks mode in recent months, with both inflation and economic growth moderating, said Peter Isley, senior vice president of investment management and research at the Commonwealth Financial Network.
Moreover, the bond market is showing some signs that traders are easing their bets on a potential recession later this year. The 2-year Treasury yield hit its highest level since early March before the failures of regional lenders Silicon Valley Bank and Signature Bank raised fears of a recession and sent yields lower.
What’s next? There are still several important economic readings for the Fed to analyze before its next interest rate decision on June 14. The May jobs report is due next Friday at 8:30 a.m. ET, and earlier estimates by economists showed a gain of 180,000 jobs and a sign. The unemployment rate rose to 3.5 percent.
“If it’s warmer than expected, it will lock in the rate increase for June,” Heppenstall said.
My colleague Matt Egan reports that Americans traveling this Memorial Day weekend will spend $1.6 billion less on gas than they did a year ago.
The national average for regular gasoline was $3.57 a gallon as of Friday, AAA data shows. It was down more than $1 on Friday from a holiday weekend a year ago, when oil prices spiked due to Russia’s invasion of Ukraine.
Drivers in all 50 states can expect cheaper gas prices this holiday weekend.
Patrick de Haan, head of petroleum analysis at GasBuddy, said: “People who wait to take a road trip this summer will be rewarded with huge savings on fuel.”
The odds of regular gas hitting the national average of $4 a gallon this summer are about one in three, up from a 2 in 3 chance in January.
But there are some risks to DeHaan’s outlook.
Read more here.
Monday: US stock markets are closed for Memorial Day.
Tuesday: Case Shiller Home Prices for March and May Conference Board Consumer Confidence Index.
Wednesday: Job Openings and Labor Turnover Survey for April and Federal Reserve Base Book.
Thursday: Mortgage rates. Earnings reports from Macy’s ( M ), Dollar General ( DG ) and Lululemon ( LULU ).
Friday: Jobs report for May.