Investors push back rate cut expectations to November
Tom Richardson
The latest Bloomberg data shows interest rate futures traders are now pricing 12.6 basis points of rate cuts from the US Federal Reserve by July for an implied rate of 5.203 per cent.
Traders have pushed back expectations for the implied overnight cash rate to not fall to below 5 per cent until December 18 at 4.92 per cent, equivalent to between one and two 25 basis point cuts from the US Federal Reserve before the end of the year.
“The modest overshoot in US March CPI inflation was sufficient to force a fragile market to reprice the first full 25bp rate cut from the Fed back to November from July,” said ANZ. “Despite the rapid repricing in market expectations, our analysis of the data beyond the headline and core readings shows that underlying inflation momentum is continuing to ease gradually.”
National Australia Bank says the market only rates the chances of a June rate cut at one in five or 20 per cent, with the market pricing in between one and two rate cuts by the end of the year.
....markets go higher if the Fed cuts but if they don't markets will still go high. How does that work? If the Fed does not have to cut, it means the US economy remains strong and earnings growth can continue. Yes, except that is looking at the rear view mirror, if the Fed does not cut or instead hikes, it is increasingly likely that the US economy will be tilted into recession, CRE will cause a systemic event and unemployment soaring ahead. Then when that looks like happening, the Fed panics and starts cutting harder... so yes, the Fed delaying a pivot can be good news rather than bad news as commonly interpreted, but would be bad news as markets look ahead. So when the Fed pivots, that is usually the point when the US economy is already in recession and the equity markets starts to fall hard, so a stubbornly high inflation, no thanks to high oil prices which is even likely to go higher with geopolitical risks, will result in a protracted tight monetary policy that will break the US economy and the markets. A dire outlook looking 6-12 months ahead. Jefferies says stocks can rally even if rates don’t drop
Bloomberg
Traders spooked by Wednesday’s hotter-than-expected inflation print need not to worry, according to Jefferies’ David Zervos, who says risk assets can thrive with or without interest rate cuts by the Federal Reserve.
The S&P 500 Index dropped more than 1 per cent Wednesday after the latest consumer price index topped economists’ forecasts, renewing concerns that the Fed will delay any cuts. The technology-heavy Nasdaq 100 Stock Index slumped 1.2 per cent as Treasury yields soared to a fresh year-to-date high near 4.5 per cent.
However, US equities are likely to continue their uptrend based on good economic news, which Zervos, the bank’s chief market strategist, expects to swamp discussions about keeping rates higher for longer.
Continued strength in US economic data and signals from the Fed that there’s no rush to ease monetary policy have prompted investors to recalibrate their expectations for the timing and frequency of interest rate cuts. After Wednesday’s inflation reading, traders are now signalling that they anticipate policymakers dialling back rates just twice this year starting in September.
Zervos said market expectations at the start of 2024 for six cuts by December was “almost as silly” as pricing in two cuts at the start of last year.
While he sees hefty cuts as wishful thinking, he also argues that policy is still less restrictive than traditional measures. He points to the Fed’s balance sheet as a sign “the stimulative vestiges of quantitative easing are still with us.”
“The market has been predicting doom on the economy because of high rate levels for a very long time,” Zervos wrote. “The missing link for the true economic storyline has been stimulative central bank balance sheets.”
Minutes from the Fed’s last policy meeting released Wednesday also showed that policymakers “generally favoured” slowing the pace at which they’re shrinking the central bank’s asset portfolio by roughly half.
Moreover, Zervos said the market appears confident the Fed won’t lose control of inflation, pointing to the so-called breakeven rate on five-year, five-year forwards, an indicator of future inflation pressure, which he noted was hardly moving.
