US Rate Cut Expectations Shift to Late 2025 as Resilient Economy Surprises Markets

Stronger-than-anticipated services sector data has prompted traders to adjust their expectations for a Federal Reserve rate cut, now eyeing the latter half of 2025. Economist had surveyed ISM to be released at 53.5, non the less date came at 54.1.

Before Tuesday’s economic releases, market sentiment leaned toward a quarter-point rate reduction by the Fed's June meeting. However, signs of economic growth and inflationary pressures in the data suggest that the US economy is gaining momentum. As a result, discussions of a rate cut are now more relevant for late 2025. Yet, if upcoming data—such as Friday’s nonfarm payrolls report—further confirms economic strength, even the prospect of a single rate cut in 2025 may seem increasingly unlikely.

Source: Bloomberg

The latest data paints a robust economic picture, albeit with some caveats. The JOLTS report showed the highest job openings since last May, but a decline in the quits rate to 1.9% hints at growing caution among workers. Layoff rates, meanwhile, remain steady at 1.1%. The ISM Services Index also exceeded expectations, with a concerning spike in the prices paid component to 64.4, its highest level since February 2023. This upward pressure on prices could make it harder for inflation to edge closer to the Fed’s 2% target, leading to an uptick in Treasury yields. With additional bond supply expected, it’s likely that yields will remain under pressure barring any major surprises, such as political developments.

The timing of Tuesday’s releases was particularly challenging for the Treasury market, which has already been contending with pressure in early 2025. The 30-year bond yield hit a 52-week high overnight, exacerbated by the inflationary signals in the latest reports. While increased job openings and rising prices paid are positive for the economy, they are less welcome in the bond market.

Additionally, the 10-year term premium—a measure of the extra yield investors demand for holding longer-dated debt rather than rolling over short-term securities—has reached its highest level since 2015. This adds to the upward pressure on Treasury yields due to increased supply, inflation concerns, and rising premiums.

Ironically, this recent data contrasts with earlier trends that had shown a pattern of downside surprises. The Citi US Economic Surprise Index even briefly dipped into negative territory, indicating more disappointing data than positive results. However, the latest figures underscore the resilience of the US economy, reshaping expectations for monetary policy in 2025.