Bond market misreads peak of U.S. rate hikes, possibly 5% by mid-next year — rate-cut expectations still premature
You should not go against the market, but there are people who view this differently.
“Traders are increasingly betting that the Federal Reserve will begin cutting rates early next year, but regarding the path of policy rates, the current U.S. bond market has been the most mistaken since the beginning of the year,” said Anna Wong, Bloomberg Economics’ Chief US Economist, and others.
As the economy slows and inflation is expected to ease, U.S. Treasury yields have fallen sharply from their peaks this year.
However, according to economists, the July U.S. employment report released on the 5th shows a solid gain in nonfarm payrolls, which is likely to challenge views that the U.S. economy has already fallen into a recession.
The swap market has priced in the federal funds rate peaking around 3.3% late this year, with a likelihood of cuts beginning in the first quarter of 2023.
While acknowledging that growth momentum is slowing, Wong and others maintain that the U.S. economy has not yet fallen into a recession, even though real GDP growth has been negative for two consecutive quarters.
The battle with inflation is far from over, and the Fed is expected to raise the federal funds rate target to 5% by mid-2023 to sufficiently curb consumer price growth, with no rate cuts until January 2024, according to economists.
Tony Rodriguez, Chief Bond Strategist at Nuveen, likewise expects inflation to stay persistent and for financial conditions to tighten significantly, causing the U.S. two-year yield to rise again. In an interview with Bloomberg Television on the 1st, he commented on the yield curve: “The inverted yield curve persists (long-term rates higher than short-term), and I expect the inversion to widen further toward year-end.”
