FOMC preview: challenging the March dot plot. FOMC preview: challenging the March dot plot. FOMC preview: challenging the March dot plot.

FOMC preview: challenging the March dot plot.

Bonds
Althea Spinozzi

Head of Fixed Income Strategy

Summary:

  • A hawkish pivot is probable at this week's FOMC meeting.
  • Powell is likely to emphasize the "high-for-longer" message, indicating that the Fed is not in a rush to begin cutting rates.
  • Emphasis on Quantitative Tightening (QT): Indications of a slowdown in QT can bolster bond markets. While the Fed maintains its hawkish stance, reducing the pace of QT means less selling pressure on US Treasuries.
  • The FOMC meeting is unlikely to bolster sentiment in bond markets, leading us to anticipate a further rise in long-term yields. Meanwhile, short-term yields are expected to remain anchored at their current levels.

Anticipated Impact of the FOMC Meeting on Bond Markets:

  1. Hawkish guidance: the Fed shows reluctance to initiate rate cuts and postpones QT tapering talks. Such communication could spur a bear-steepening of the yield curve. This scenario could propel 10-year yields towards the 5% mark, while 2-year yields might surpass 5% to find resistance next at 5.25%. However, a significant breakthrough beyond 5.25% for 2-year yields would likely necessitate a Federal Reserve shift towards hiking rates.
  2. Balanced guidance: the Fed conveys a willingness to delay rate cuts while hinting at imminent QT tapering. Bond markets may remain rangebound. In such a scenario, 10-year yields are expected to trade within a range of 4.58% to 4.73%, while 2-year yields are likely to hover around the 5% mark.
  3. Dovish guidance: If the Fed asserts its intention to implement three rate cuts this year and signals imminent QT tapering. Bond yields could see a decline. Under this scenario, 2-year yields might decrease to around 4.75%. Although 10-year yields could drop to 4.5%, they are anticipated to resume an upward trajectory due to the economy's resilience and persistent inflationary pressures.

How many rate cuts in 2024?

A hawkish pivot is probable at this week's FOMC meeting as markets challenge the dot plot's forecast of three interest rate cuts for the year, and policymakers are increasingly wary of persistent inflationary pressures.

Bond futures are currently pricing in a 35-basis-point rate cut by December, with only a 22% probability of a hike in July, just prior to the commencement of the US Election campaign. Additionally, OIS are indicating the likelihood of the first rate cut occurring on November 7th, two days after the election.

Market resistance against early and aggressive rate cuts stems from several key factors:

  • Strong US economy. The US economic landscape continues to show resilience with robust economic activity, supported by strong consumer spending despite increased price sensitivity.
  • The labor market remains strong, accompanied by positive real wage growth, which bolsters consumer spending.
  • Disinflationary trends have halted, with some indications of inflationary acceleration. Both the CPI index and core PCE have exhibited upward movement, with core PCE reaching a 4.4% annual rate in the first three months of the year, surpassing levels seen from 1990 to 2021.

Recent Fed communications have taken a hawkish tone, signaling a reluctance to ease monetary policy prematurely. Consequently, all eyes will be on Powell's press conference, with investors eager to discern whether policymakers are leaning towards fewer rate cuts than indicated in the dot plot.

Are discussions surrounding a slowdown in Quantitative Tightening advancing?

The significance of QT tapering cannot be overstated, as it currently holds more weight than anticipated rate cuts for several reasons:

  • Slowing the pace of QT would precede any rate cuts by the Federal Reserve. As the RRP diminishes and bank reserves decline, the importance of QT tapering becomes paramount for policymakers as they want to reach the level of ample/scarce reserves slowly.
  • QT tapering might delay interest rate cuts, making the “high-for-longer” message stickier.
Source: Bloomberg.

Other recent Fixed Income articles:

29-Apr Bond Markets: the week ahead
25-Apr A tactical guide to the upcoming quarterly refunding announcement for bond and stock markets
22-Apr Analyzing market impacts: insights into the upcoming 5-year and 7-year US Treasury auctions.
18-Apr Italian BTPs are more attractive than German Schatz in today's macroeconomic context
16-Apr QT Tapering Looms Despite Macroeconomic Conditions: Fear of Liquidity Squeeze Drives Policy
08-Apr ECB preview: data-driven until June, Fed-dependent thereafter.
03-Apr Fixed income: Keep calm, seize the moment.
21-Mar FOMC bond takeaway: beware of ultra-long duration.
18-Mar Bank of England Preview: slight dovish shift in the MPC amid disinflationary trends.
18-Mar FOMC Preview: dot plot and quantitative tightening in focus.
12-Mar US Treasury auctions on the back of the US CPI might offer critical insights to investors.
07-Mar The Debt Management Office's Gilts Sales Matter More Than The Spring Budget.
05-Mar "Quantitative Tightening" or "Operation Twist" is coming up. What are the implications for bonds?
01-Mar The bond weekly wrap: slower than expected disinflation creates a floor for bond yields.
29-Feb ECB preview: European sovereign bond yields are likely to remain rangebound until the first rate cut.
27-Feb Defense bonds: risks and opportunities amid an uncertain geopolitical and macroeconomic environment.
23-Feb Two-year US Treasury notes offer an appealing entry point.
21-Feb Four reasons why the ECB keeps calm and cuts later.
14 Feb Higher CPI shows that rates volatility will remain elevated.
12 Feb Ultra-long sovereign issuance draws buy-the-dip demand but stakes are high.
06 Feb Technical Update - US 10-year Treasury yields resuming uptrend? US Treasury and Euro Bund futures testing key supports
05 Feb  The upcoming 30-year US Treasury auction might rattle markets
30 Jan BOE preview: BoE hold unlikely to last as inflation plummets
29 Jan FOMC preview: the Fed might be on hold, but easing is inevitable.
26 Jan The ECB holds rates: is the bond rally sustainable?
18 Jan The most infamous bond trade: the Austria century bond.
16 Jan European sovereigns: inflation, stagnation and the bumpy road to rate cuts in 2024.
10 Jan US Treasuries: where do we go from here?
09 Jan Quarterly Outlook: bonds on everybody’s lips.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) Ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law. 

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.