Equity futures rise and Treasury yields plunge as traders price aggressive Federal Reserve cuts following Friday's disappointing payrolls report.
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Chief Market Analyst
Friday's shock United States (US) jobs report has provided the catalyst for a market rebound, with equity futures pointing higher across the board. The disappointing payrolls data has shifted the narrative from concerns about a resilient US economy to relief that monetary policy may turn more accommodative.
US equity futures gained ground in early Asian trading, suggesting Wall Street will attempt to recover from last week's losses. The weak employment data has given investors confidence that the Federal Reserve (Fed) will be forced to act more aggressively on interest rates.
European futures are following suit, with traders betting that synchronised global easing will provide support for risk assets. The shift in sentiment is palpable, with investors now viewing economic weakness as potentially positive for markets rather than a cause for concern.
The bond market reaction to Friday's payrolls data was nothing short of dramatic. Two-year Treasury yields plunged by 25 basis points (bp) in the largest single-day decline for over a year, as traders rushed to price in more aggressive Fed action.
Federal funds futures now show more than 100 bp of rate cuts expected by mid-2026, a significant shift from the more cautious outlook that had prevailed just days earlier. Markets are now pricing in an 85% probability of a September rate cut, sharply up from previous expectations.
The yield curve has steepened considerably as longer-term rates have fallen alongside shorter-term ones, though not quite as dramatically. This suggests markets believe the Fed will need to act quickly to support an economy that may be showing more weakness than previously thought.
The US dollar index experienced one of its sharpest single-day declines in months on Friday, but has found some stability in Asian trading hours. The greenback's retreat reflects growing doubts about US economic outperformance, which had been a key driver of US dollar strength.
The euro has gained ground against the dollar, though the single currency faces its own challenges with European growth concerns mounting. British pound sterling has held relatively steady around $1.33, supported by expectations that the Bank of England (BoE) may not cut rates as aggressively as the Fed.
Markets are digesting news of significant personnel changes at key economic institutions, including the firing of the head of the Bureau of Labor Statistics. These moves are raising questions about the independence of economic data collection and monetary policy formation.
The announcement that Trump will appoint a new Fed governor adds another layer of uncertainty to monetary policy expectations. Markets are trying to assess whether these changes could lead to more politicised economic policy or data manipulation concerns.
Asian equity markets showed a mixed performance overnight, with MSCI Asia ex-Japan rising 0.7% led by South Korean shares. The gains reflect the global risk-on sentiment following the US jobs data and expectations of easier monetary policy.
However, Japan's Japan 225 (Nikkei 225) lagged behind its regional peers, weighed down by Japanese yen strength and concerns about the domestic economic outlook. The Japanese market's underperformance highlights how currency movements can quickly change the relative attractiveness of different regional markets.
Thursday's BoE meeting has taken on added significance following the shift in global monetary policy expectations. Markets are now pricing in an 87% probability of a 25 bp cut, with expectations for two more reductions by mid-2026.
Sterling has held relatively steady near US$ 1.33 despite increased expectations for BoE easing. The pound's resilience suggests traders believe UK rate cuts may not be as aggressive as those expected from the Fed, maintaining some interest rate differential.
The Monetary Policy Committee (MPC) remains split on the appropriate course of action, with some members favouring a more cautious approach to rate cuts. This division could lead to interesting dynamics in the decision and subsequent communications from the central bank.
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