Investors wagering on a more dovish Federal Reserve next year are getting ahead of themselves, according to analysts at Société Générale.
Expectations for rate hikes in 2019 have tumbled as stocks have buckled and senior Fed officials have spoken. Yet Omair Sharif, senior U.S. economist at Société Générale, said in a Wednesday research note that remarks by Fed Chairman Jerome Powell and his colleagues merely described the state of play, leaving the fate of next year’s rate policy dependent on how economic data pan out — news to few investors.
“The rapid scaling back of Fed-hike expectations is said to have been due in large part to more dovish Fed-speak in the last two weeks,” said Sharif. “However, in our view, this is a misread of Fed officials’ comments.”
Since the last Fed meeting in November, the federal fund futures market, where traders can bet on the future outlook for interest rates, shows the market’s expectation of two or more rate hikes in 2019 slipping to around 37% from 67%, meaning those futures now forecast one to two rate increases next year. The 10-year Treasury note yield
TMUBMUSD10Y, -0.06%
has also retreated 16 basis points to 3.076% since Nov. 8, according to Tradeweb.
Traders rowed back rate-hike expectations after remarks by Fed Chairman Jerome Powell and his No. 2, Richard Clarida, highlighted global growth concerns, which some said showed a central bank placing more focus on the downside risks in continuing on its path of steady rate hikes.
Particular attention was devoted to Clarida’s throwaway remark that the central bank was moving closer to the so-called neutral rate, the level of monetary policy that neither slows down nor speeds up the economy. Economists say the central bank will end its rate-hike cycle slightly above the neutral level.
See: Markets think Powell ‘blinked’ in Dall as
The benchmark fed funds rate stands at a range between 2% and 2.25%, below the long-term neutral rate of 3%, as indicated by the dot-plot forecasts of the Fed’s rate-setting committee.
But Sharif said trigger-happy traders also overlooked Clarida’s other comment that the data would play a significant role in determining the central bank’s rate-hike path in 2019 as interest rates approach estimates of the neutral level. According to estimates from economists polled by MarketWatch, the U.S. economy is set to grow by 2.7% next year, giving little solace to those hoping for fewer rate increases next year.
“There was nothing new in last week’s Fed-speak apart from the acknowledgment that pushing into restrictive territory will be an issue determined by the data, which is not, at least to our minds, new information,” said Sharif.
Yet some investors have jumped on the dovish Fed bandwagon after the slump in equities tightened financial conditions, drawing speculation the Federal Reserve could slow or pause its rate-hike schedule to give Wall Street relief.
But a stock-market selloff driven by deflating once-exuberant tech shares is not likely to dissuade the Fed from its steady trajectory. The Nasdaq Composite
COMP, +1.57%
tumbled 5.9% to lead November’s autumn rout, with Apple
AAPL, +0.68%
down more than 18% this month, FactSet data show.
“I doubt very much the Fed cares about the recent rout in technology stocks. At the end of day, hiking rates has little effect on Apple, Facebook
FB, +3.30%
or Google
GOOGL, +2.14%
GOOG, +2.01%
,” said Tom di Galoma, managing director of Treasurys trading at Seaport Global Securities, in an e-mail.
Read: Stock-market investors are sending Fed’s Jerome Powell a crystal-clear message
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Either way, investors won’t have to wait long to know where the Fed is headed. The central bank’s most important officials will soon appear before the public, with Powell slated to speak twice over the next two weeks.
“A slew of important Fed-related events will take place over the next two weeks, and we suspect the occasions could be used to pull market expectations for the funds rate back towards the Fed’s stated path,” said Sharif.
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