Key insights
- The probability of a Fed rate cut by year-end increased significantly following a US-Iran cease-fire agreement. Market expectations shifted from pricing in a potential rate hike to anticipating rate cuts. Oil prices fell, and yields decreased as rate cut bets increased. However, uncertainty remains high, and elevated energy prices could still drive inflation. BofA suggests the Fed might consider cutting if the unemployment rate rises above 4.5%.
Investing.com -- Investors increased bets on Federal Reserve interest rate cuts after the U.S. and Iran agreed to a two-week cease-fire.
The probability of at least one rate cut by December rose to 43% from 14% a day earlier, according to CME Group data.
Market expectations for Fed policy shifted dramatically since the war began, moving from multiple anticipated cuts to pricing in a potential rate increase.
A rate hike is now fully priced out, though investors have not returned to their prewar outlook of multiple rate reductions. Uncertainty over the cease-fire remains high, and clearing the logjam in global oil and gas markets could take months once the Strait of Hormuz reopens. Elevated energy prices could continue to drive up inflation in the coming months.
"For some time now, we have argued that the Fed might consider cutting if the u-rate moves above 4.5%," BofA economist Stephen Juneau wrote in a note to clients last week.
"The question is whether that level has shifted higher, given the inflation risks from the Iran conflict. We still think a urate above 4.5% would make the Fed uncomfortable, especially given that the job openings and hiring rates moved down in the Feb JOLTS report."
The ceasefire followed diplomatic efforts led by Pakistan, hours before President Donald Trump's threatened deadline. The reprieve allowed time for the two sides to reach a longer agreement to end the six-week war.
Oil prices fell to below $100 per barrel following the ceasefire announcement, but remain above pre-war levels of around $70 per barrel. Gold prices rose and futures climbed.
Yields fell as rate cut bets increased on expectations that oil prices will decline further and avoid triggering a large inflation increase.