The market once again doubts the Federal Reserve.
The midpoint for 2023 rose to 4% in the latest June edition, with policymakers pledging to move beyond neutral. The market followed this thinking for a while, but quickly rethinked the signs of slowing demand and peaking prices.
The February fed funds futures contract now sits at 2.29% and US 2-year yields are at 2.79%, two signs the bond market doesn’t think the Fed will even hit 3%, let alone 4%.
The short term problem for the markets is that we are still being hit with data from April, May and June when demand was stronger. But there are signs of a drop in new orders and the travel chaos and extremely high prices at the moment will also be a deterrent on the services spending side.
Tomorrow we will have the minutes from the last Fed meeting and they are sure to show an extremely hawkish Fed. However, things are changing so rapidly that we may see the message tempered later this week by Fed officials.
It’s a similar story in Europe which is the flashpoint of the current market chaos and the potential for slowing global growth. There is no doubt that Europe is facing an energy shock, but the job market is not nearly as tight as in the United States and underlying inflation is better contained. Today alone, the rates market narrowed the range of hikes to 120 basis points this year from 130 basis points.
For now though, we’re stuck in a market whirlwind of worries about higher interest rates and weaker growth while giving little credit (apart from bonds) to the growing likelihood of muted inflation and rate hikes. This pivot will come whenever the Fed offers a hint.
This article was written by Adam Button at www.forexlive.com.