Early Thursday morning, the Federal Reserve began its easing cycle with a sharp interest rate cut, demonstrating its determination to prevent further deterioration in the labor market.
The Fed’s first rate cut lowered its policy rate by 50 basis points to a range of 4.75% to 5%. This gave the Fed and investors more time to prepare for what might happen next.
“Our judgment is that we’re going to see a soft landing,” said Erik Aarts, senior fixed-income strategist at Touchstone Investments. But he said the rate market is still trying to figure out what will happen next.
“The old adage about ‘buy the news, sell the facts,’ I think we’re going to see some of that,” Aarts said. While he expects the next six months to be volatile, he also expects buying opportunities, especially if the two-year Treasury yield and the 10-year Treasury yield continue to rise from their recent lows.
"It's worth noting that entering this upcoming cycle, the market is pricing in a stronger outlook than the past six cases," a team of rates and currency strategists at BofA Global wrote in a note to clients on Thursday. for significant easing.”
Fed funds futures recently implied a drop in short-term rates of nearly 2%, but that also swings from 2% to 4.5%, a "fairly large range of outcomes" as the Fed begins raising rates in 2022, according to Torsten Slok, chief economist at Apollo Global Management.
Moreover, investors’ attempts to use history as a guide to the future may be futile. The BofA Global team believes that this easing cycle is not directly related to any recent one, not even the 1995 “soft landing” scenario that investors and the Fed hope to replicate.
Market price action over the past week has highlighted the difficulty of accurately predicting the path of interest rates, as long-term rates have continued to rise even as the Federal Reserve has cut short-term rates.
The 10-year Treasury yield has been rising since the Federal Reserve cut interest rates on Wednesday.
Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, said in a note to clients Thursday that he would buy when yields rise meaningfully. He still expects the 10-year U.S. Treasury yield to reach 3.5% by the end of the year, but the downward path will be a "tug of war."
While the bond market has played a big role in driving stocks recently, the Dow Jones Industrial Average and the S&P 500 were both at record highs on Thursday, appearing to have shrugged off any early concerns about the Federal Reserve's big first interest rate cut.
Clearly, the trajectory of the labor market will play an important role in informing the Fed's next interest rate move. The latest data showed that the number of people applying for unemployment benefits fell to the lowest level since May.
Stock market performance after previous Fed rate-cutting cycles has been mixed, with economic conditions determining whether investors face big losses or gains.
Meanwhile, Touchstone's Aarts said the Fed has been "playing catch-up with the labor market." He believes the next six months should help clarify for investors whether it has done that job. But he said the rate market is still trying to figure out what's going to happen.
The article is forwarded from: Jinshi Data