(Bloomberg) — Traders raised the odds of another quarter-point rate increase by the Federal Reserve in May in the wake of strong employment data released Friday during a holiday-shortened session.
Swap contracts referencing Fed meeting dates repriced to levels indicating more than 80% odds of the US central bank raising its policy rate range to 5%-5.25% on May 3. The May contract’s rate increased to just over 5.03%, a level 20 basis points higher than the effective policy rate has been since the last increase.
The repricing accompanied a move higher in Treasury yields to their highest levels in several days, and in the dollar, which reached its highest level since March 15 against the yen.
“Almost the entire distribution of the policy rate outlook over the next year needs to shift higher,” Barclays (LON:) interest-rate strategist Anshul Pradhan said in an April 7 research note. “The market should price in a higher probability of an upside inflation surprise and a lower probability of aggressive rate cuts.”
US inflation data to be released April 12 is forecast to show easing in the annual pace to 5.1% in March from 6% in February, according to the median estimate of economists surveyed by Bloomberg. Excluding food and energy prices, the pace is expected to increase to 5.6% from 5.5%.
After the US central bank set its policy band at 4.75%-5% on March 22, the odds of a May rate hike almost vanished amid a collapse in bank shares that began after several institutions failed. Since March 24, the sector has stabilized.
Swap contracts continue to expect rate cuts by year-end, however. The December contract’s rate is around 4.40%, pricing in at least two quarter-point rate cuts from the expected peak in May.
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