Market pricing for the Fed trajectory tends to overshoot.

It was clear in January that rate-cut pricing for 2024 was too aggressive with more than half a dozen quarter-point reductions in the forward curve. At one juncture, a March cut was almost fully priced.

By the time the May FOMC meeting rolled around this week, all but 29bps of what, at the extremes, was nearly 175bps of rate-cut premium, had evaporated into a succession of warm data, a big repricing over a fairly compressed window.

Then came Jerome Powell’s tacit repudiation, during the post-meeting press conference, of the nascent effort to price some chance of rate hike in 2024. “It’s unlikely that the next policy move will be a hike,” Powell told a reporter who asked about Michelle Bowman’s long-held contention that additional tightening may ultimately be necessary.

Thursday’s update on unit labor costs should’ve been bearish for US rates, but as BMO’s Ian Lyngen and Vail Hartman wrote, “the sharp rally in the two-year sector reflects an acknowledgment on the part of the market that if rate hikes aren’t on the table, 2s with a five-handle quickly begin to look very cheap.”

On Friday, a meaningful miss on the NFP headline accompanied by a below-consensus AHE print pushed yields lower still. Were it not for a big jump on the underlying price gauge, the ISM services release likely would’ve been more fuel on the fire given the contraction-territory headline print.

Ultimately, twos headed into the US afternoon richer by ~16bps for the week. Do note: It was briefly far more dramatic than that. In the immediate knee-jerk reaction to the jobs headline, two-year yields were down 17bps on the session, pushing the week-on-week rally to ~25bps, as illustrated above.

As for rate-cut pricing, the odds of a move at September’s SEP meeting re-priced to a coin toss on Friday. For 2024 as a whole, we were back to two cuts (almost).

Equities responded to the suddenly friendlier rates backdrop. What was a weekly loss for the S&P ended up being a wash (more or less), leaving the benchmark within striking distance of records hit in late-March.

“Recent client meetings and calls showed investors were positioned near ‘peak hawkish’ ahead of and into the Wednesday Fed meeting,” Nomura’s Charlie McElligott said Friday morning, just prior to the jobs report. “With [NFP] whispers moving higher, the risk is that the hawkish ‘upside data surprise’ scenario has seen the bar go too high, setting up asymmetry towards a potential short squeeze in Treasurys on anything less than hot.”

Twos were 4.86% when Charlie sent that note around at 8:15 AM ET. 16 minutes later, twos were 4.71%.

Writing on Thursday afternoon, BMO’s Lyngen described the rates zeitgeist: “Reassess, reprice, repeat.”