NEW YORK (Reuters) - U.S. interest rates traders on Thursday added bets the Federal Reserve would lower borrowing costs later this year to prolong the current economic expansion in the wake of disappointing domestic data on retail sales and industrial output.
They now reckon the U.S. central bank may cut rates as early as September as renewed trade tension between China and the United States may drag on the economy in the coming months if the world’s two biggest economies cannot reach a deal.
The Commerce Department said retail sales slipped 0.2% in April, falling short of a 0.2% increase forecast by analysts polled by Reuters. The March figure was revised to a 1.7% jump, marking their biggest increase since September 2017.
The Fed said factory output decreased 0.5% last month, steeper than the 0.1% dip projected by analysts.
Interest rates futures prices added to earlier gains and bond yields extended their initial drop, with two-year yields hitting a 15-month low following these weak readings.
“The rally in bonds, with yields falling faster at the front end, suggests expectations the Fed will capitulate to the need for rate cuts, but not fast enough or deep enough to spark even a modest increase in inflation,” said Chris Low, chief economist at FTN Financial in New York.
At 10:31 a.m. (1431 GMT), federal funds futures implied traders saw a 53% chance the U.S. central bank may lower its target range on short-term rates by a quarter point to 2.00%-2.25% at its September policy meeting, up from 46% late on Tuesday, according to CME Group’s FedWatch program.
Fed funds contract suggested traders placed a 74% chance of a quarter-point cut at the Fed’s December policy meeting, compared with 70% late on Tuesday. The implied probability of a December rate cut briefly hit 78% earlier Wednesday.
Rates futures retreated from their session highs after news that U.S. President Donald Trump is expected to delay a decision to impose steep tariffs on auto imports by up to six months.
(For a graphic on 'Traders' U.S. interest rate expectations' click tmsnrt.rs/2WP9q3q)
Reporting by Richard Leong; Editing by Nick Zieminski and Jonathan Oatis