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It can’t carry on like this much longer.

 The confidence with which bond markets are now betting that the Federal Reserve must “pivot” (start cutting rates) and do so imminently has never been greater. This divergence has been present and growing for a while, but some resolution must now be close.

Fed funds futures now price a likelihood that over the next six meetings  from now until January, we’ll see the equivalent of five 25-basis-point cuts 

This is based on various assumptions, but the idea that inflation will come under control very swiftly is critical to them.

The two-year inflation breakeven suggests that inflation will average almost exactly 2%, the Fed’s official target, into the first half of 2025.

 It’s eminently reasonable to brace for a recession before much longer. The more important question is whether it will come with sufficient speed and severity to force the Fed to cut rates at least five times over its next six meetings.

The extra cash that landed in consumers’ wallets via stimulus payments hasn’t all been spent yet. Judging how the consumer will behave in unprecedented circumstances is nightmarishly difficult.

The confidence in a Fed pivot is so strong at present that there is more danger of a breakout toward higher yields. But it’s best to avoid extreme positioning in any direction. 

If there’s one big reason to bet on a Fed pivot, it’s the crisis afflicting US regional banks

Banks’ share prices have tanked, and the shareholders of the failed institutions have been cleaned out. No depositor has lost a penny. 

Peter Tchir of Academy Securities made this point forcefully with a comparison to the Global Financial Crisis of 2008. He pointed out that it was largely a myth that nobody saw the problems coming — many had been sounding the alarm from the moment house prices started to turn down in 2006. 

John Authers Bloomberg 8 maj 2023


Market Ignores Fed Chair Powell's Comments, Prices in More Interest Rate Cuts



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