The strong** trend in the global bond market suggests that traders are generally convinced that the Fed's current rate hike cycle is over. At present, the "expectation of interest rate cuts" can be described as savage, and the focus of market debate has even turned to when global central banks such as the Federal Reserve will start the interest rate cut cycle, and how much interest rate cuts will be made. Even Fed Chairman Jerome Powell's repeated "hawkishness" and his statement that the Fed will tighten monetary policy further if necessary does not seem to be able to stop this trend.
The current round of bond market is big *** and aggressive interest rate cut bets,It can be regarded as the seventh time in two years that global financial markets have bet on the Fed's "** pivot"., the previous six almost all failures, the Fed can be described as "fiercely grasping the market". Combined with the cracked U.S. labor market, which has seen a two-year high in jobless claims, and weak economic data such as sharply cooled U.S. inflation data, the latest round of interest rate cut bets is on full swing, and all investors are now waiting to see if the market can get the Fed in one fell swoop.
After the "big wave**" of the global bond market, the market began to look for the latest signs of a soft or hard landing for the US economy. In terms of interest rates** market pricing, it indicates that the Fed will cut interest rates by at least 125 percentage points.
Therefore, the main question for the market now is whether the US economy will succeed in achieving a "soft landing" or whether it will fall into a worse recession, the prospect of a "hard landing". However, in terms of the general trend in the bond market, both scenarios would indicate that a rate cut is imminent, possibly as early as March. The market is now expecting the Fed to cut interest rates by at least as much as 125 percentage points, this trend seems to clear the way for lower yields and the persistence of risky assets such as **.
The Fed's interest rate swap market is biased – the market expects the Fed to cut rates by about 125 basis points by the end of next year
At the opening of trading on Monday, the spot market continued to rise under the help of weak U.S. economic data and the expectation of interest rate cuts, and continued to rise after refreshing the all-time high set in May this year, once touching $2,130 an ounce, up nearly $60 in a day, an increase of 3%. Forex Live analyst Eamon Sheridan said that this is because the financial market's prospect of future Fed rate cuts is spurring investors to go on a big swing, and global investors are betting heavily that the Fed will start a rate cut cycle at the beginning of the year.
Powell's "hawkishness" seems powerless to prevent aggressive rate cut expectations.
This does not rule out the possibility of further volatility in the market. Some conflicting data may raise doubts in the market, and the Fed** may keep reminding the market that they are in no hurry to ease monetary policy. Fed Chair Jerome Powell's speech on Friday evening tried to push back on investors' strong expectations for a rate cut in the first half of 2024, and the rate cut expectations did not appear to have been affected in any way. The CME "Fed Watch Tool" shows,Interest Rates** The market is betting that the odds of a 25 basis point rate cut by the Fed at its March meeting are higher than 60%, and even reached 80% at one point, and the market is still pricing in an aggressive 125 basis point rate cut by the Fed next year.
Federal Reserve Chair Jerome Powell concluded his week-long speech on Friday, saying that although policy has entered restrictive territory, it is "premature" to speculate at this stage when the Fed's monetary policy may be eased, and stressed the option to maintain further rate hikes.
However, these hawkish comments from Fed Chair Jerome Powell did not stop bond traders from pushing bonds higher further, with interest rate markets still pricing in a 125bp rate cut next year.
U.S. Treasuries are likely to move too fast, and traders have already suffered a lot in betting too early on the Fed's pivot (e.g., after the collapse of Silicon Valley Bank, the market was betting that the Fed would start cutting interest rates in June, but it didn't do so). But there is a sense that the 10-year Treasury yield, known as the "anchor of global asset pricing," has reached the peak of this rate hike cycle, and that weak data will at some point force a large chunk of the nearly $6 trillion in record cash in the money market** into longer-dated Treasury bonds with yields above 4%. Even after 60 basis points last month, the yield on benchmark U.S. Treasuries is significantly higher than the staged lows set in the first half of this year, when the collapse of U.S. banks sparked recession fears.
Michael Cudzil, a portfolio manager at Pacific Investment Management (PIMCO), a world-renowned asset manager, said: "We can assume that the Fed has acknowledged the market movement and said that the economic data is weak, which reassures the market, and they tend to exaggerate and overdo things." "There's also the possibility that data slowdowns are something even more scary. ”
A series of data releases this week will test the courage of US bond bulls to bet on interest rate cuts, especially whether the latest US non-farm payrolls report can add fuel to the fire of rate cut expectations and thus help global bonds **continue**. Economists widely expect employment to reach 200,000 in November from 150,000** in the previous month as striking workers return to work. The unemployment rate is expected to stabilize at 39%, while wages are expected to slow to around 4% annual growth.
Kelsey Berro, a fixed-income portfolio manager at JPMorgan Asset Management, said in an interview that inflation is falling faster than the Fed expected, which further reinforces the sentiment of the end of the rate hike cycle that "the Fed last raised interest rates in July". "While Treasury yields could move sharply higher on any given day, if we see a rate cut next year, we could see yields continue to move lower. ”
Looking ahead, the upcoming US consumer inflation data and the start of the Federal Reserve's last two-day meeting of the year are the next hurdles beyond the jobs report. How the Fed outlines the outlook for interest rate policy next year and through 2025 through its "dot-plot" could inject some uncertainty into the market. The Fed's "dot plot" data released in September showed that the easing over the next 12 months was just 05 percentage points, far from the market is betting on at least a rate cut of 125 percentage points.
You can disagree with the magnitude of the US Treasury yield**, not its direction," said Cudzil from PIMCO. "From historical data, 4.25% or 4The 5% yield on 10-year Treasuries is attractive for long-term investment. ”
Our benchmark** is that the unemployment rate will continue to rise in 2024 and approach 5% by the end of the year – which would be a mild recession by historical standards. We expect:In March 2024, the Fed will have enough insight into whether the economic downturn has already triggered a rate cut. We expect the Fed to cut rates by a total of 125bp in 2024 and another 125bp in 2025. Bloomberg Economics economists Anna Wong and Eliza Winger said.
Is the market pricing in a Fed rate cut too far ahead?
For most of the year,Bond markets and return on risk assets have been frantically weighed down by the Fed's expectation that it will either maintain a higher interest rate policy "for longer" or by expectations that it will have to return and push up borrowing costs. Now, the Treasury market feels a clearer path to bet on the Fed starting its rate-cutting cycle in March。But it has also sparked a heated debate among analysts: Is the market too far ahead?
Mark Dowding, chief investment officer at Royal Bank of Canada (RBC) BlueBay Asset Management in London, said he expects Treasury yields to likely move higher in the coming weeks after investors were "chasing returns like crazy" in November.
After taking a positive view on ** at the beginning of November, we took some profit on yield** and turned short ** last day**. Dowding said in an interview.
Inflation data released last week showed that the core personal consumption expenditure** index, which excludes the volatile food and energy components, was 3 year-on-year in October5%, which remains close to the Fed's anchored target of 2%.
While the Fed's preferred measure of potential inflation is moving in the right direction, Dowding said the Fed may not start a rate-cutting cycle as the market expects, and in the view of RBC Bluebay Asset Management, it will not happen until the reading falls below 3%, which is not expected to happen until the second half of the year. "We think the market is significantly ahead of the Fed in terms of rate cut expectations," Dowding said. ”
The market has "turned to bet" many times by far ahead of the Fed, can it succeed this time?
Henry Allen, a macro strategist from Deutsche Bank, saidSince the Federal Reserve and other central banks around the world began their tightening cycle, the bond market is betting on a "pivot" for the seventh time. In the strategist's view, the market's latest bets on the Fed ending its rate hike cycle and moving to rate cuts are likely to materialize, while also increasing the possibility of another "false dawn".
Prior to this month, the last time bond market traders collectively bet on the Fed's imminent pivot was in March, when U.S. regional banks such as Silicon Valley Bank went bankrupt at the speed of light, prompting bond markets to price in expectations that the Fed would begin to cut interest rates aggressively later this year, or even by the middle of the year. At that time, the two-year Treasury yield fell to 3At a 55% 2023 low, the 10-year Treasury yield fell to 325% or so. The Fed has since created a liquidity support tool for the banking system to curb financial turmoil, and the Fed has been able to continue tightening policy.
As for expectations now, Deutsche Bank strategist Allen wrote: "At least for now, it is still too early for the Fed to pivot to rate cuts, especially as inflation remains well above the Fed's target." ”
In Allen's view, this bet is likely to be just as "false dawn", but it does have the potential to open the door to a different point of view. "Historical data tells us that this pivot can happen suddenly and momentarily when it does happen," he wrote. In my opinion, a further rise in unemployment or another huge negative shock like that could be the catalyst for this to happen. ”
Sebastian Vismara, senior economist at BNY Mellon Investment Management, said: "The challenge is how to prevent the market from getting too excited. As long as there isn't any real risk of rate hikes, I think the market will continue to have this tendency to price in rate cuts. ”
"Time and time again, bond market traders have misplaced bets on the timing of rate cuts in this rate hike cycle, either pricing in tightening bets that seem to be excessive in hindsight. "Such an outcome could be self-defeating, and central banks such as the Fed may have to collectively turn hawkish again and try to turn the tide with all their might," Vismara said. ”
Henry Cook, senior economist from MUFG, said: ".Central bankers will want to resist this aggressive approach for as long as possible to avoid an easing of tighter financial conditions. But he also noted that if economic data continues to deteriorate across the board in the coming months, it will be increasingly difficult for central bankers to maintain their positions.