(Bloomberg) — Fixed income investors bet that a U.S. recession is imminent amid growing disagreement over how markets and the Federal Reserve view the economic outlook. Stacked.
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The gap is a high-profile corner in a $24 trillion market headed for its steepest monthly rally since October 2008 after traders stopped betting on further rate hikes this year and raised expectations for yields. It’s especially noticeable on one yield curve. cut It’s a striking rebuke to Fed Chairman Jerome Powell, who this week suggested he wouldn’t consider a 2023 rate cut.
Over the past year, the bond market has repeatedly faltered in anticipation of a policy pause and a move towards lower interest rates.
But now, following the first US bank failure since the 2008 financial crisis, there is a surge of sentiment that something has broken. That’s evident across markets, with financial stock gauges poised for the worst month since the early days of the pandemic, with rate cuts by year-end after stakes could peak at 5.5%. Earlier this month in the Federal Reserve swaps priced a percentage point.
Powell argued this week that a rate cut would not be the Fed’s “baseline scenario” for this year, but acknowledged turmoil in the banking sector and a possible tightening of lending could replace policy hikes. This was enough to reinforce the market view touted by people like Jeffrey Gundlach that the central bank would soon reverse its 12-month hiking cycle.
So, even if next week’s new number on the Fed’s backed core inflation measure is expected to continue rising at an annual pace of 4.7%, the market will continue to see the banking crisis and the lows since the Volcker era. We will focus on the threat to economic growth from the most aggressive pace of rate cuts in .
Kenneth Taubes, chief investment officer at Amundi Asset Management US, said: “Inflation remains high, but the bond market says the economy is headed for a slowdown. The US Federal Reserve is at 0. The steepening after the .5 point rate hike is “not a typical reaction” and shows that the market “sees rate hikes as the new nail of the economy”.
For months, the market has been clinging to an inverted curve where policy-sensitive bond rates rise above long-term bond rates as a harbinger of a recession in the not-too-distant future. But now, that reversal has been undone as short-term rates plummeted, signaling to market watchers that a recession is on the horizon. Two-year yields plummeted, and he briefly dipped below the 30-year rate for the first time since September.
“If the deflationary shocks to the banking system are strong enough, the odds of a recession this year are much higher,” said Amar Leganti, a fixed income strategist at the Hartford Fund, which manages about $124 billion. indicate. “The curve shows that the Fed is likely to make a move later this year.”
Bloomberg Economics forecasts a 75% chance of a recession in the third quarter, with the unemployment rate rising to 5.0% in 2024 from 3.6% reported in February.
Related article: New Fed forecast suggests central banks are bracing for recession
Vanguard portfolio manager John Mazire says he has been holding steepened positions in his portfolio for longer periods of six to 12 months, dampening short-term gains in short-end yields and a flatter curve. “The impact of the credit crunch is tighter lending terms and a slower economy, but that’s at least a quarter ahead,” he said.
Still, the bond market risks a nasty reversal if the Fed sticks to its stance and the economy absorbs any easing in bank credit. This would result in the Fed cutting its policy rate from its current range of 4.75% to 5% to around 3%. Washing away these bets inevitably causes pain.
But some argue that the real risk for traders is a hard landing, which will prompt a sharp rate cut.
“The market is pricing in a quick rate cut and we think 200 basis points is enough to stabilize things,” said Priya Misra, global head of rates strategy at TD Securities. “That would only bring interest rates closer to neutral, which makes sense in a soft-landing scenario,” she says, but “if lending standards tighten, this could lead to a deeper recession.” she warns.
In that regard, Amundi is increasing its exposure to US Treasuries in the 5- to 7-year region of the curve.
“Historically, this is a good place to get ahead of a recession,” Taubes said.
what to see
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economic data calendar
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March 27: Dallas Fed Manufacturing Index
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March 28: Wholesale stock. Promote the trade balance of goods. FHFA Home Price Index; S&P Core Logic Case Shiller Home Prices; CONFERENCE COMMITTEE CONSUMER CONFIDENCE. Richmond Fed manufacturing index and business conditions.Dallas Fed Service Activity
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March 29: MBA Mortgage Application.pending home sale
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March 30: Filed for unemployment insurance. GDP Annualized QoQ; Personal Consumption; GDP Price Index; Core PCE QoQ
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March 31: Personal income and expenses. PCE deflator, MNI Chicago PMI.Mishiagun University Sentiment, Inflation Expectations
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Federal Reserve Calendar
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March 27: Fed Governor Philip Jefferson
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March 28: Fed President Michael Burr
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March 29th: Bar
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March 30: Boston Fed President Susan Collins.Richmond Fed President Thomas Birkin
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March 31: New York Fed President John Williams. Fed President Christopher Waller.Governor Lisa Cook
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Auction calendar:
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March 27: Invoices for 13 and 26 weeks.two year notebook
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March 28: 5-Year Bonds
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March 29: Bill for 17 weeks. 2-year floating rate bond. 7 year notebook
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March 30: 4 and 8 week invoices
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