The market sees a less-than-50% chance of a June rate cut after hot factory data

• Bond-market expectations of a June rate cut fell below 50% after strong factory data, according to Bloomberg data.
• ISM manufacturing data showed an expansion on Monday for the first time in 16 months.
• Inflation is in line with Fed hopes, but creates a "wait and see" situation for rate cuts, a former Fed official said.

Bond-market expectations of a June rate cut took a hit on Monday as new factory data pushed odds below 50%, according to Bloomberg data.

The ISM manufacturing index came in hotter than anticipated, showing expansion for the first time since 2022. A sharp rise in production and new orders fueled the gauge's bounce back, ending 16 months of contraction.

As with previous data points, it's another sign of the US's undeterred economic strength, which casts doubt on whether the central bank should rush to reverse its policy.

After the ISM report's release on Monday, long-dated Treasury yields witnessed one of this year's widest daily increases, with both the 10- and 30-year rate climbing around 13 basis points. Yields have been climbing as bond traders turned sour on rate cut expectations, triggering a market sell-off.

Meanwhile, swaps contracts indicate monetary policy to drop less than 65 basis points this year, according to overnight index swaps and SOFR futures, cited by Bloomberg. That's below the Fed's own projections, the outlet said.

Futures markets data tracked by the CME Fedwatch Tool also shows that investors are losing faith in the June timeline, with less than 57% expecting the Fed to cut by then. Two weeks prior, 60% anticipated a cut that month.

For its part, the Fed remains confident that rate cuts are achievable, with Friday's personal consumption expenditures report in line with expectations. On an annual basis, the inflation metric notched a 2.5% increase.

While Chairman Jerome Powell has since noted this is what the central bank wants to see, he cited that the economy's strong footing gives it little reason to hurry cuts.

"Inflation has for a couple of months remained a little higher than one might half hoped," Former Vice Chairman Roger Ferguson told CNBC on Monday. "I think right now it's very much a wait and see. The data may be firmer and they may not cut, we'll see.