Traders Adjust U.S. Rate-Hike Expectations Following Weak GDP Data, According to Reuters

By Richard Leong

U.S. interest rate futures experienced an uptick on Friday, influenced by economic growth data that fell short of expectations for the second quarter. This led traders to adjust their forecasts regarding a potential interest rate increase by the Federal Reserve.

A key indicator reflecting the borrowing costs among banks for three-month dollar loans recorded its smallest daily increase in over a week, signaling diminished demand from U.S. money market funds for short-term bank debt.

According to the Commerce Department, the gross domestic product (GDP) grew at an annual rate of 1.2 percent, following a revised increase of 0.8 percent in the first quarter.

“Today’s GDP data suggests there are still significant hurdles to overcome before any policy tightening can occur,” remarked Todd Colvin, senior vice president at Ambrosino Brothers in Chicago.

In reaction to the disappointing GDP figures, federal funds futures surged to their highest levels in more than a week. The futures contract for December delivery indicated a 33 percent probability that the U.S. central bank would raise its target range for policy rates—currently set between 0.25 percent and 0.50 percent—by the end of the year, down from the 43 percent expectation recorded on Thursday. Earlier in the week, traders had estimated a 53 percent likelihood of a rate hike by December.

Additionally, the London Interbank Offered Rate (Libor) for three-month dollar loans increased by 0.26 basis points to 0.7591 percent, marking its highest level since May 2009. This rise represented the smallest increase since July 19.

The decline in money fund demand for bank debt can be attributed to several prime funds shifting to government-only securities in preparation for an impending deadline on new regulations set for October 14.

Colvin noted, “The rise in three-month Libor has complicated matters, as money market reforms have driven a transition from prime funds to government-Treasury funds.”