Unlike the Federal Reserve itself, investors believe the “Fed pivot” moment is approaching rapidly. Forward swaps point to a peak in interest rates of up to five per cent. Some market experts however are “uncomfortable” with the view and don’t exclude a level of six percent of the US benchmark.
Chris Turner, global head of markets at ING, said the market refuses to believe that the Fed will take interest rates to 5 per cent and then hold that interest rate for a long period. Starting in the second quarter of last year, the Federal Reserve raised its benchmark interest rate to 4.5 per cent in an attempt to curb record inflation.
“We are becoming increasingly convinced of the view that the Fed can ease its pressure on monetary brakes,” Turner said. “The market seems to be pricing in a 50 basis point easing for the second quarter of 2023.”
Fresh US inflation data will be released Thursday.
Market vs Fed
Media appearances by two Federal Reserve officials on Monday reaffirmed the view that a peak in interest rates is near. Raphael Bostic, president of the Atlanta Fed, and Mary Daly, president of the San Francisco Fed, noted that the US central bank will probably have to raise interest rates above 5 per cent before taking a break.
Fed President Jerome Powell, speaking in Stockholm on Tuesday, refrained from commenting on a possible reversal of interest rate policy. “Restoring price stability when inflation is high may require measures that are unpopular in the short term while we raise interest rates to slow the economy,” he said.
“Earlier, the market still expected 25 basis points of interest rate cut,” said AXA chief economist Gilles Moëc. He remains “uncomfortable” with the priced-in interest rate expectations, which he says are too positive.
“The market is currently looking at the US economy as a glass half-full. The latest data suggest that the US economy is slowing quite rapidly. This probably contributes to the market choosing to ignore the still robust job growth in December,” Moëc said.
US economy still creating jobs
The US economy added 223,000 extra jobs in December, above the consensus of 203,000. James Knightley, chief economist at ING, said there were as many as 28,000 net downward revisions for the past two months, “which means we are broadly in line with expectations”.
Details show that job growth was led by the services sector, with education and healthcare increasing by 78,000, leisure/hospitality by 67,000 and trade and transport by 27,000. Employment in construction increased by 28,000. Construction employment increased by 28,000 jobs and manufacturing by 8,000 jobs.
ING’s Knightly discerned declines in some key sectors, particularly in the staffing sector, which recorded its fifth consecutive monthly decline. “This is an important signal, as these workers are always the first to be laid off in a downturn (because they are the easiest to lay off) and are likely to indicate increasing weakness in the coming months,” he said.
Business services declined for the second consecutive month and information services employment also fell.
Dimon not convinced
Meanwhile, JPMorgan CEO Jamie Dimon, speaking on Tuesday on Fox Business, said he believed interest rates could rise further and “it could well be six percent”.
Dimon said he believes that there is a 50 percent chance that current market expectations of a peak around five percent are correct. “There is a 50 percent chance that it should go to six per cent,” he said in the interview.