New Delhi

The US economy is witnessing a surprising shift as bond traders prepare for a "no landing" scenario a situation where economic growth continues, inflation reignites, and the Federal Reserve has little room to cut interest rates. Recent months saw discussions centered around slowing growth and potential rate cuts, but a blowout jobs report has disrupted that narrative as detailed in a report by Bloomberg.

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The report further stated that, the latest data, showing the fastest job growth in six months, a drop in unemployment, and rising wages, has sent shockwaves through the bond market. Treasury yields surged, with investors scrambling to adjust their bets, abandoning the expectation of a half-point interest rate cut in the near future. The report has caused traders to rethink their positions, as concerns about an overheating economy are back in play.

"The pain trade was always higher front-end rates due to fewer rate cuts being priced in," said George Catrambone, head of fixed income at DWS Americas. "Now, it’s possible the Fed will either pause rate cuts or even consider raising rates again."

Previously, the debate focused on whether the economy would achieve a "soft landing"—where growth decelerates without causing a recession—or a "hard landing," where economic conditions deteriorate sharply.

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The Federal Reserve, after battling inflation for two years, shifted its attention to stabilizing the labor market, with a substantial 50-basis-point rate cut in September. However, the jobs report has renewed concerns about the appropriateness of rate cuts when the economy is growing steadily, stocks are at record highs, and inflation remains a threat.

Prominent voices in finance, including Stanley Druckenmiller and Mohamed El-Erian, have cautioned the Fed against being too quick to cut rates, warning that inflation is not fully under control. Former Treasury Secretary Larry Summers echoed these concerns, describing both "no landing" and "hard landing" scenarios as potential risks. Tracy Chen, portfolio manager at Brandywine Global, also pointed out that China’s recent stimulus measures further reduce the likelihood of additional rate cuts.

Inflation concerns have resurfaced, particularly with the recent surge in oil prices. Bond traders’ inflation expectations, measured by the 10-year breakeven rate, reached a two-month high. With key inflation data looming, traders and the Fed will be closely monitoring any signs of inflationary pressures.

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The market's recalibration comes as swap traders reduce their expectations for easing, now pricing in fewer rate cuts for the coming year.