In the day just passed, bonds did an admirable job shaking off the ill effects of a significantly stronger Philadelphia Fed Manufacturing Business Outlook Survey (aka "Philly Fed").  This report is a solid and fairly consistent market mover.  It beat its forecast by the largest amount since 2009.  Those facts alone are pretty scary for bonds, but there were nuances that helped mitigate the damage (we discussed them in detail yesterday in the Huddle and the Recap).  Chief among these was a speech by San Fran Fed Pres. Williams which markets took as a potential indication of a 50bp rate cut in July.  He's since given an interview saying that wasn't his intention.

In the day ahead, nothing really matters because yesterday--and indeed the past several months in general--have shown us that the market's expectations for Fed rate cuts are deeply entrenched.  In other words, it would have taken more than one amazing Philly Fed report to derail the July cut.  Moreover, rate cut expectation movement after the Williams speech wasn't even fully undone by the retraction!

With that in mind, just how entrenched are rate cut expectations?  Today's charts show various iterations of 10yr yields compared to July rate cut expectations as well as 2019's rate expectations.  In all cases, the lower the green/orange lines are moving, the lower the market sees the Fed Funds Rate for the time frame in question.  The first 2 charts have relative ranges for the July vs 2019 expectations--that is to say, July's line may appear lower than the 2019 line on the chart, but that doesn't mean the market sees a lower Fed Funds Rate at the end of July.  The y-axis scaling is merely expanded to show the best relative movement.  The 3rd chart uses the same y-axis for the rate cut expectations.

Bottom line: at least a 0.25 cut has been a foregone conclusion for weeks and a 0.75 cut has been the most likely outcome for 2019.  Perhaps most importantly, last week's rising rate trend did nothing to challenge either of those probabilities in the bigger picture.  Even in the smaller picture (see July 11th on the first chart), rate expectations never took the same sort of hit seen in 10yr yields.  All of this speaks to some extra underlying bond market resilience until further notice.