Markets, until last week's blowout jobs numbers, were all but certain that the Federal Reserve would have cut interest rates by its May meeting - the question was whether that first reduction would come in March, or at the May meeting itself.
Now even a May rate cut is less certain. Market pricing reflects roughly a 30% chance the Fed will still be holding rates at its current level after that meeting, down from around 10% a week ago, and less than 5% at the start of the year, according to CME's FedWatch tool.
Changes in those expectations are likely to be the main driver of day to day market swings in the coming weeks, just as markets' daily churn during the first month of 2024 was all about whether or not rate cuts would come in March.
The driver of the shift from March to May was Friday's data that showed nonfarm payrolls increased by 353,000 jobs last month, the largest gain in a year, and far higher than the 18,000 average of economists polled by Reuters.
"Crazy strong jobs number means Fed will wait" said James Knightley ING's chief international economist, who does see a cut in May.
Some think the Fed will hold on until June. HSBC's U.S. economist Ryan Wang, who is in that camp, said: the "labor market resilience may allow FOMC policymakers to be more cautious and deliberate on the timing of any move."
Traders were also digesting the latest remarks from Fed chair Jerome Powell who said in an interview that aired on Sunday night that the Fed can be "prudent" in deciding when to cut its benchmark interest rate.
The interview took place before the jobs report however, but it did serve to underscore the trend -- higher bond yields and a stronger dollar.
The benchmark 10-year Treasury yield rose to as high as 4.094% points in Asian trading hours on Monday, up around 6 basis points having finished Friday up nearly 17 bps.
Two-year yields jumped eight basis points to 4.451%, their highest in a month, and that helped the dollar index to an eight week high and weighed on U.S. stock market futures, last down around 0.2%.
On the docket for Monday are the release of the senior loan officer survey and ISM services activity data.
There is also plenty more Fedspeak to come this week, with Bank of Atlanta President Raphael Bostic up later on Monday.
Key developments that should provide more direction to U.S. markets later on Monday:
* Federal Reserve Bank of Atlanta President Raphael Bostic speaks
* U.S. January ISM services data
* U.S. earnings: Caterpillar, McDonald’s, Tyson Foods, Simon Property
(Reporting by Alun John; Editing by Ed Osmond)
