According to the CME Fedwatch Tool, the odds of a 25 bps rate hike have fallen to roughly 42% now with the remaining 58% probability siding with no change in interest rates. For some context, the balance of probabilities were more or less flipped at the end of last week after having seen the odds of no change fall drastically from around 85% at the start of last week here.

The decline in Treasury yields can be said to be two-fold. On the one hand, it indicates some degree of economic discomfort brought about by the tightening cycle. And it signals that traders are worried about worsening data points in the weeks/months ahead.

The fallout is largely coming after the banking turmoil, as that seems to be the checkpoint in which markets are adopting in determining that central banks have perhaps gone far enough with rate hikes.

On the other hand, falling rates could reflect the view that markets are anticipating the end to the Fed’s tightening cycle. In this regard, with growing concerns on the economic outlook, markets are sending a message that if policymakers keep going, something else is going to break.

The whole narrative above is still very much burgeoning but it may be one that takes over rather rapidly. I mean, we are already starting to see the switch around that bad news is indeed bad news now.

With the US jobs report in focus tomorrow, a poor reading there might be the biggest signal yet that rate hikes are taking a toll on the labour market and the economy. Coupled with softer inflation indicators so far this week, that might be reason enough for markets to chase a stronger pricing that the Fed will not hike in May.

While that may sound like bad news for the dollar, it is likely to be balanced out by a more risk-off wave across markets. These are certainly interesting times.

This article was written by Justin Low at www.forexlive.com.