jumped 5.4 per cent in January
The data triggered a sell-off in bonds as traders reassessed the Fed’s tightening path. The yield on the US two-year note, which reflects monetary policy expectations, rose above 4.8 per cent – the highest since 2007. The US dollar climbed to its highest level since December. Futures are now pricing in 0.25 percentage point rate rises at each of the Fed’s next three meetings, and imply a 27 per cent probability that the US central bank will return to a larger 0.5 percentage point increase next month., a significant increase from expectations of around 4.8 per cent last month. The Fed funds rate currently sits in a 4.5 per cent to 4.75 per cent range.
“The market was increasingly confident that the narrow path to a soft landing was at least broadening, albeit from a low base,” said Matthew Sherwood, Perpetual’s head of investment strategy.“But the problem is the US economy is still too strong which means markets are expecting more tightening. So while recession risks in the next six months are pretty modest, the risk in 12 months is more elevated.