By: Dave Chenet, CFA, CAIA
|Close||Weekly return||YTD return|
|US Treasury 10yr Yield||3.45%|
A very volatile week in markets saw the major indices rally on Friday to finish the week only modestly lower. The week was highlighted by the Federal Reserve decision announcement on Wednesday to hike the federal funds rates by 0.25% to 5.0-5.25%. While the rate increase was largely anticipated, remarks by Fed Chair Powell skewed more hawkish than the market had hoped. Powell signaled to the market that the Fed intends to remain “data dependent” and will keep the flexibility to continue to hike rates should inflation remain high.
As depicted in this week’s Chart of the Week, the market has a very different expectation than the Fed. The current futures pricing reflects a 99.9% probability that the Fed will cut rates at least once by the end of the year and a 97% chance that the Fed will cut by at least two 0.25% decreases. The median expectation is for the Fed to cut by 0.75% by year-end. Consistent with market prognostications are economist forecasts; the Atlanta Fed GDP Now forecasting tool estimates that the economy will grow at a 2.7% pace in Q2, vs economist expectations of no growth.
Market rate-cut expectations and economists’ call for stalling growth paint a stark picture for near-term risk assets. The Federal Reserve has acknowledged that its actions impact the economy through “long and variable lags.” The ongoing bank turmoil and credit crunch may be early indications of building stress in the financial system, however, the Fed has drawn its line in the sand and is messaging that, while a pause may be justified, it has yet to see the case for rate cuts. Moreover, and under-reported in the financial press, the Fed has been unflinching in its ongoing balance sheet reduction. History tells us that “Mr. Market” is usually more prescient than the Fed, but, in our view risks to near-term asset prices are mounting. Investors will be well-served by employing a disciplined approach that is structured around their unique investment time horizon and financial plan.
What We’re Reading:
Non-Farm Payroll Data Surprises with Strong Performance
WSJ: The Covid-19 Crisis is Officially Over. Everything changed.
Coucil of Economic Advisers: The Potential Economic Impacts of Various Debt Ceiling Scenarios
Chart of the Week:
Source: CME Group