Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Head of Fixed Income Strategy
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:
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.
The significance of QT tapering cannot be overstated, as it currently holds more weight than anticipated rate cuts for several reasons:
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