August 5, 2019 / 8:07 PM / 4 months ago

MONEY MARKETS-Traders raise bets on U.S. rate cuts into 2020

(Updates market action, adds quote, graphics)

By Richard Leong

NEW YORK, Aug 5 (Reuters) - U.S. interest rates futures jumped, with some hitting contract highs, on Monday as traders increased bets the U.S. Federal Reserve would embark on a campaign to cut borrowing costs to cushion the economy from the U.S.-China trade war.

China allowed the yuan to breach the key seven-per-dollar level for the first time in more than a decade, a sign Beijing might be willing to tolerate more currency weakness that could further inflame the trade conflict.

Chinese state media said local firms have halted U.S. agricultural purchases, elevating nervousness about tit-for-tat measures by the world’s two biggest economies.

China’s measures followed U.S. President Donald Trump’s threat last week to impose 10% tariffs on $300 billion of Chinese imports starting Sept. 1.

The deterioration in trade talks has touched off a dramatic sell-off in stocks and other risky assets, and stoked a safe-haven stampede toward U.S. Treasuries, yen and gold.

Analysts estimated that retaliatory tactics by the United States and China could reduce U.S. economic growth by 0.2 percentage point to 0.4 percentage point over the next several months.

In late U.S. trading, federal funds futures suggested traders positioned for a 26% probability the U.S. central bank will decrease the target range on interest rates to 1.50%-1.75% at its Sept 17-18 policy meeting, up from 2% late on Friday, according to CME Group’s FedWatch tool.

“This outlook for a 50-basis-point cut is pretty reasonable given the current backdrop,” said Jon Hill, an interest rates strategist at BMO Capital Markets in New York.

The Fed’s target range on borrowing costs is currently at 2.00%-2.25%.

The U.S. central bank lowered rates last week for the first time since 2008, but Fed Chairman Jerome Powell said at a news conference, “Let me be clear – it’s not the beginning of a long series of rate cuts.”

All fed funds contracts for 2020 delivery set contract highs. They implied traders see about a 45% chance the Fed would lower rates to at least 1.00%-1.25% in April 2020, compared with 22% late on Friday, CME’s FedWatch showed.

Reporting by Richard Leong; EDiting by Steve Orlofsky and Richard Chang

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