Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Fedspeak Monitor: Hawkish leaning comments, but markets in denial
Charu Chanana
Chief Investment Strategist
Summary: The markets continue to expect a Fed pivot despite a broad-based pushback against rate cut expectations that are priced inn for next year. This puts the onus on Fed Chair Powell who speaks this week on Wednesday to deliver a clear message on the timeline of the Fed policy and the upside risks to inflation and interest rates despite the slowdown in economic data. The FOMC then enters a quiet period next week and focus will turn back to comments from WSJ’s Timiraos ahead of the 14-15 December FOMC meeting.
The pushback from Fed speakers on a Fed pivot continues, and the most hawkish Fed member James Bullard was on the wires yesterday clearly stating that the market is under-estimating the Fed path. He also said that rates will need to be kept at a sufficiently high level all through 2023 and into 2024 even if the Fed reaches restrictive territory by Q1 2023.
NY Fed President John Williams also said "there's still more work to do" to get inflation down. He also hinted at “modestly higher” path of interest rates than what he voted for in September, sending another signal that December’s dot plot could see an upward revision, while also hinting at rate cuts in 2024. He provided some clear forecasts: unemployment rate rising from 3.7% to 4.5%-5.0% by late 2023; inflation declining to 5.0-5.5% by the end of 2022 and 3.0-3.5% by late 2023; modest economic growth this year and in 2023.
However, the message from the Fed is getting lost in translation as the markets are looking at the long-term impact of the tighter Fed policy and still expecting that the Fed will have to pivot earlier. This puts the onus on Fed Chair Powell, who speaks on the economy and labor market on Wednesday at the Brookings Institute in Washington. Chair Powell potentially needs to make another sharp Jackson Hole-type speech to deliver the message of the Fed path more clearly to the markets.
The FOMC then goes into a quiet period at the end of this week as the December 14-15 meeting approaches, and then it will become key to monitor what WSJ’s Timiraos has to say. Meanwhile, key US economic data this week and next also remains on watch.
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