Source: Federal Reserve Chair Jerome Powell. AFP.
Source: Federal Reserve Chair Jerome Powell. AFP.
Strikingly, financial markets have moved sharply in the last four weeks as investors position for a potential pivot by the Federal Reserve away from interest rate hikes this year to early cuts next year.
Source: Bank of Singapore, Bloomberg
The S&P 500 is up from 4,100 to almost this year’s high of 4,600 - despite the fed funds rate at 5.25-5.50% being far above estimated neutral levels for interest rates of around 2.50% as the first chart shows.
Similarly, 10Y US Treasury yields are down from 5.00% to 4.50% and 10Y US real yields (adjusted for inflation expectations) have fallen from 2.50% towards 2.00% as the second chart shows. In addition, gold is near USD2,000 and the EUR has jumped from 1.04 to 1.09 against the USD since October.
Source: Bank of Singapore, Bloomberg
November’s payrolls data on 8 December will be key ahead of the Federal Open Market Committee meeting on 12-13 December.
Source: Bank of Singapore, Bloomberg
October’s employment report was soft with payroll gains slowing to 150,000 jobs and unemployment ticking up further to 3.9% as the last chart shows. Another soft job report for November may be enough for the Fed to remove its tightening bias next month by forecasting no more rate hikes now.
A pivot away from rate rises this year to cuts next year may be highly significant for risk assets. Though we expect the Fed will only ease from next summer if inflation keeps falling, financial markets could be buoyed over the new year by early cuts potentially limiting US recession risks to a mild downturn in 2024.
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