Several days ago, Jeff Gundlach said that the “rate hike cycle has left the building“. He was right: as of this moment, the Fed’s plans to “renormalize” are practically finished, with the market now pricing in just one rate hike over the next 3 years. And since it is virtually assured that a recession will take place some time in that period (the current growth cycle is already twice the duration of the average US expansion), the Fed’s next move is virtually assured to be a rate cut, not a hike. The only question is whether the Fed will ignore reality and hike anyway, unleashing the second coming of the Ghost of 1937, and with it a market crash.
But before we get there, here are some observations from Deutsche Bank about this week’s dramatic FOMC fireworks which assured that the Fed’s tightening cycle is all but dead.
From DB’s Parag Thatte
Rates shock: market now pricing only one Fed hike over next 3 years. As bond yields in Europe and Japan hit new historical lows this week, the US 10y yield fell to a 4-year low, just 20bps above its 2012 historical lows.
This followed a weak payrolls report, Brexit uncertainty, the beginning of the ECB’s corporate bond buying program and a very dovish June FOMC meeting which significantly cut rate forecasts in the out years. The market has now almost completely priced out a rate normalization cycle, pricing only one 25bps hike over the next 3 years
The market was pricing in a rate normalization cycle as recently as December, albeit a muted one. Hiking expectations fell sharply during the Q1 growth scare and have not recovered even as various other market indicators and broader data have. In particular, rates have disconnected further from overall data surprises which are near neutral as the payrolls disappointment was largely offset by positive surprises in other data.
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