• Futures bets show 8% probability of rate increase next month
  • April employment report extends series of below-forecast data

Bond-market traders and strategists are starting to tune out the authorities they once looked to for guidance on the path of interest rates as economic data fall short of forecasts.

Futures traders have all but ruled out the possibility that the Federal Reserve will raise rates at its next policy meeting in June, even after several officials this week said they were still considering that option. Economists at Goldman Sachs Group Inc. and Bank of America Corp. pushed back expectations for the next rate boost to September from June after a report Friday showed the U.S. added fewer jobs than forecast last month.

The moves come after data this week pointed to slowing global economic growth and stoked concern about the pace of recovery in the U.S. The Fed is trying to raise rates even as other central banks maintain or add stimulus. New York Fed President William Dudley said Friday that the employment report didn’t change his economic outlook, after officials including St. Louis Fed President James Bullard said earlier this week that June’s policy meeting would be “live” for a rate move if the economy was on track.

“It’s the Fed who cried wolf,” said Brian Edmonds, head of interest rates in New York with Cantor Fitzgerald Co, one of 23 primary dealers that trade with the central bank. “People just don’t believe it. They don’t believe that the Fed can tighten in this environment.”

Treasuries gained this week, with the 10-year note yield falling five basis points, or 0.05 percentage point, to 1.78 percent as of 5 p.m. Friday in New York. The price of the 1.625 percent security due in February 2026 was 98 5/8. 

Fed Forecasts

Yields on two-year notes, which are more sensitive to Fed policy expectations, declined for a second week, falling five basis point to 0.73 percent.

The U.S. economy added 160,000 jobs in April, Labor Department figures showed Friday, compared with the 200,000 median forecast of economists surveyed by Bloomberg.

After the report, traders pushed the futures-implied probability of policy tightening in June below 10 percent for the first time since February, down from as high as 43 percent in March.

Fed officials emphasized concerns about U.S. economic progress in their April policy statement, saying growth in household spending had moderated since their previous meeting even as labor-market conditions “have improved further.” In March, policy makers including Fed Chair Janet Yellen pared forecasts for 2016 rate increases to two from four, after boosting rates in December for the first time in almost a decade.

The Fed may raise rates in September, followed by another increase in March 2017, following a “string of disappointing data,” including the April jobs report, Bank of America economists led by Ethan Harris wrote in a note Friday.

Data Disappoint

Gauges of U.S. growth have been trailing economists’ estimates by a widening margin. Citigroup’s Economic Surprise Index for the U.S., which measures the strength of data relative to forecasts, fell to minus 36.7 on Friday, the lowest since Feb. 24.

Not everyone is sure the Fed’s June meeting will pass without event. Jefferies’ LLC Chief Economist Ward McCarthy wrote in a report Friday that it was “too early to throw in the towel” on June and said he considered a rate increase likely next month, citing the Fed’s move away from an emphasis on the domestic labor market.

Fed funds futures show traders aren’t fully pricing in the next rate hike until 2017, while assigning coin-flip odds to even one increase by the end of this year.

“They may be proven wrong,” Cantor’s Edmonds said, “and it will be painful if they are.”

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