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Traders still believe the Fed will cut by a quarter point in July even after blowout jobs report

Key Points
  • The fed funds futures market is now pointing to a 93.5% chance of a quarter-point rate cut next month and a 6.5% probability of no rate changes, according to the CME FedWatch tool.
  • Traders were pricing in a 30% chance of a half-point cut in July before the release of the jobs report Friday. Odds for a quarter-point cut were 70% before the report.
  • Payrolls jumped in June well above expectations as the U.S. economy added 224,000 jobs.
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After a blowout jobs report, traders still believe the Federal Reserve will cut rates later this month, but less aggressively now.

The fed funds futures market is now pointing to a 93.5% chance of a quarter-point rate cut next month and a 6.5% probability of no rate changes, according to the CME FedWatch tool. Traders were pricing in a 30% chance of a half-point cut in July before the release of the jobs report Friday. Odds for a quarter-point cut were 70% before the report.

The tool is based on futures pricing from live markets and reflect the views of traders placing real bets on the CME exchange.

Payrolls jumped in June well above expectations as the U.S. economy added 224,000 jobs, according to the Labor Department. Economists surveyed by Dow Jones had expected nonfarm payrolls to rise by 165,000.

The strong numbers came after May's big disappointment of only 75,000 jobs added, which raised doubts about the sustainability of the longest economic expansion in history. That May number was revised lower to 72,000.

"These are good numbers, but a rate cut in July is still all but inevitable," said Luke Bartholomew, investment strategist at Aberdeen Standard Investments. "Employment growth remains a bright spot amid a fairly mixed bag of U.S. data and yet markets have come to expect a cut now so will fall out of bed if they don't get one. It does give the Fed some breathing space in the sense that there's no immediate need now to signal a significant cutting cycle."

The June jobs report did give a few data points that traders say could still warrant a rate cut. Wage growth fell short and the unemployment rate ticked higher.

Traders began increasingly betting on an easing of monetary policy after Fed Chair Jerome Powell said the case for more accommodative policy has strengthened. The central bank also the dropped word "patient" from its statement at its last policy meeting.

The Fed has a two-day meeting on July 30-31.