The Fed cut rates by 50bp last week, although the guidance for future meetings was very open – passing the ball back to the markets to study economic data. Markets rallied the day after the Fed and are now priced for a very positive scenario. In our opinion, this view is too rosy, and we believe it’s the right time to reduce both risk and duration.
Fed Review – Hawkish 50
The Fed cut rates by 50bp last week. Powell spoke of a “recalibration” of interest rates, while pointing to a resilient but slowing economy. The dot plot implied 100bp of cuts this year and next, while growth and inflation projections were largely unchanged. The unemployment projections were raised to 4.4% for this and next year, leaving the labour market marginal room to loosen further without alarming the Fed and forcing more big cuts. Besides the dot plot, the guidance for future meetings was very open – passing the ball back to the markets to study economic data.
Markets – It’s not so easy
Markets rallied the day after the Fed and are now priced for a very positive scenario. In late July, aggressive cuts were priced because risk assets turned weak. Now risk is back at highs, but the same number of cuts is priced on the curve. Market thus repriced a much more dovish central bank and expect a deep cutting cycle despite no recession. We see this view of the next twelve months as too rosy, and we believe it’s the right time to reduce both risk and duration. Weakening data may not be as supportive of spreads and equity, and the 2025 pricing remains 50bp more dovish than the central bank dot plot. US elections are likely to be the next market theme, which opens risks to both risk assets and rates.
Algebris Investments’ Global Credit Team
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