A sharp re-rating of expectations for a U.S. interest rate cut could trigger a violent bond market rally sparked by weakening economic data as investors fear the Federal Reserve will have to ease its tight grip on the economy much faster than expected to avoid a recession.
Earlier this week, investors were assessing whether the U.S. central bank may have been too late in moving to a less restrictive stance when it held borrowing costs steady at its July rate-setting meeting. That changed dramatically late in the week, when manufacturing data on Thursday and weak jobs data on Friday fueled recession fears and a sharp rescaling of monetary policy for the rest of the year.
“The rising unemployment numbers show that the Fed is lagging behind,” said Tony Farren, managing director at Mischler Financial Group.
