US rate futures lift chances of November hike after overall upbeat data

11:15 am Thursday, July 06th, 2023

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) – U.S. interest rate futures on Thursday saw an increased probability of another rate increase by the Federal Reserve in November after news private payrolls surged last month, suggesting a still tight and strong labor market.

The benchmark fed funds futures factored in a 47% chance of a hike in November in late morning trading, compared with about 36% the day before, according to CME’s FedWatch. For next month’s Fed policy meeting, the odds of a 25 basis-point hike were at 95%, compared with 90.5% late on Wednesday.

Private payrolls jumped by 497,000 jobs last month, the ADP National Employment report showed on Thursday. Data for May was revised lower to show 267,000 jobs added instead of 278,000 as previously reported. Economists polled by Reuters had forecast private employment increasing by 228,000.

Friday’s non-farm payrolls report should be crucial and will likely confirm a resilient jobs picture. Economists have forecast new jobs of 225,000 in June, down from 339,000 in May.

Other economic reports on Thursday also suggested a solid economy, even though inflation may be slowing a bit.

The U.S. services sector grew faster than expected in June as new orders picked up, but a measure of prices paid by businesses for inputs fell to a more than a three-year low, suggesting that services inflation would continue to ease.

Prices paid by services businesses for inputs, an inflation measure, fell to 54.1, the lowest since March 2020, from 56.2 in May.

“If job growth and, or inflation continue to come in hotter than expected in the second half of 2023, the Fed could make not just one but two more quarter percentage-point rate hikes before going on hold through the first half of 2024,” wrote Bill Adams, chief economist at Comerica Bank in Dallas.

U.S. rate cut prospects also have been pushed out to July 2024 when the fed funds target rate is expected at around 5%, according to Refinitiv’s FedWatch. A few weeks ago, the rate futures market expected Fed easing in March next year.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Nick Zieminski)