US | Markets double down on expectations of a deep easing cycle

Summary

Treasury yields fell over the past month as futures almost fully price in a second straight rate cut next week, after Powell warned last week that the labor market may now be at a stage where “further declines in job openings might very well show up in unemployment.”

Key points

• Key points:
• The easing cycle is set to continue next week through a second consecutive 25bp rate cut despite the government shutdown delaying key jobs and inflation data releases.
• Lower perceived uncertainty about the policy path has lingered even as some have called for caution amid mixed signals from strong activity data and a softening labor market.
• Term premium changes this year have been largely offset by alternating up and down periods. Still, most risks priced in since Trump’s election have not unwound.
• Markets price in a much deeper policy easing for 2026 than Fed projections; caution expressed by dovish officials like Waller has done little to curb such expectations.
• A cautious tone from the FOMC policy statement and Powell next week may challenge these expectations, prompting a partial rebound in long-term yields after their recent decline.

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