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The last mile of Fed repricing

In Short

Investors seem to throw in the towel regarding rate cut hopes. Following solid US economic data and sticky inflation prints, markets are now pricing a full first Fed rate cut only for November and see the easing cycle ending above 4%, almost a full percentage point above levels we deem neutral. What is more, despite more encouraging disinflation progress in the euro area, markets also discount a striking ECB reluctance to lead the Fed in the easing cycle.

Highlights:

  • Amid reaccelerating US inflation, markets have axed rate cut expectations for all major central banks. We expect the start of Fed easing to be postponed till September, but not cancelled. A first ECB rate cut remains due in June with at least quarterly cuts to follow thereafter.
  • We acknowledge two-sided risk for yields near term, with a resilient US economy and stickier prices the most imminent risks. But with many bad inflation news now priced in, and 5-year forward 3-month rates near 4%, we see value in prudent long duration. 
  • Amid the tug of war between high valuations and higher uncertainties on the one hand and global economic green shoots on the other, we keep an overexposure in IG Credit to reap the carry from risk premia. But we keep a neutral stance on Equities and High Yield amid elevated risks of further setbacks.

     

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Market Perspectives 05_2024
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