Markets See Less Than 50 Percent Chance of June Rate Cut Amid Hot Factory Data

• Bond market expectations for a June rate cut fell below 50% after strong factory data, Bloomberg data showed.

• On Monday, ISM manufacturing data showed the first expansion in 16 months.

• A former Federal Reserve official said that the inflation is consistent with the Fed's hopes, but for the rate cut to create a "wait-and-see" sieve.

Expectations in the bond market for a June rate cut took a hit on Monday as new factory data pushed the probability of a cut below 50%, Bloomberg data showed.

The ISM Manufacturing Index beat expectations, expanding for the first time since 2022. The rebound was driven by strong growth in production and new orders, ending 16 months of contraction.

As with previous data points, this is yet another sign that the strength of the US economy is not waning, raising questions about whether the central bank should be in a hurry to reverse policy.

Following Monday's ISM report, long-term bond yields rose the most sharply in a single day this year, with both the 10-year and 30-year yields climbing about 13 basis points. The rise in yields came as bond traders were disappointed by expectations of a rate cut, which triggered a sell-off in the market.

At the same time, swaps carried a name that suggests monetary policy will be lowered by less than 65 basis points this year, according to Bloomberg, citing data from overnight index swaps and SOFR futures. This is lower than the Fed's own forecast, the media said.

Futures market data tracked by the CME FedWatch tool also shows that investors are losing confidence in the June schedule, with fewer than 57% of investors expecting the Fed to cut rates by then. Two weeks ago, 60% of investors expected the Fed to cut rates in the month.

As far as the Fed is concerned, it still believes that a rate cut is achievable, and Friday's Personal Consumer Spending report was in line with expectations. On an annualized basis, the inflation indicator grew by 2.5%.

While Matron Jerome Powell later pointed out that this was the result the central bank wanted to see, he argued that the strong foundation of the economy gave the central bank little reason to rush into a rate cut.

"The inflation rate has been a little higher than people have been expecting for months," former Vice President Roger Ferguson told CNBC on Monday. I think it's time to wait and see what happens. The numbers may be firmer, they may not cut back, we'll see.

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