Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Access all our platforms from a single account.
Macro Insights: Is an early Fed pivot likely?
Charu Chanana
Chief Investment Strategist
Summary: A bunch of different factors are coming together, putting more weight on the argument of an early Fed pivot and a peak in global central bank hawkishness. These have included somewhat softer economic data out of the US this week, plus the financial instability risks, and the pivot from Reserve Bank of Australia to a slower pace of rate hikes lately. We put all this in perspective, and how it is still premature to expect a Fed pivot unless we see clear signs of disinflation.
Why do we have increasing calls for a Fed pivot lately?
A slight weakness in US economic data this week has been quite a turn from the upbeat data that we have been getting out for the economy until last week. US consumer confidence data rose to 108 in September, smashing expectations, with both present situation and expectations marching higher. Thereafter, we had the first sub-200k weekly jobless claims print since May, suggesting that the labor market remains tight.
But this week, the tables turned with a weaker-than-expected ISM manufacturing print and a sluggish JOLTs job openings which hinted at the tightness of the labor market moderating. But these few data points do not confirm any change in trend, or the Fed policy.
RBA pivot fueling calls for a peak in global central bank hawkishness
When one of the G7 central banks pivot, shock waves are expected. But the case for the Reserve Bank of Australia is somewhat more unique. It’s signal to slow down the pace of rate hikes has stemmed from concerns about the impact on housing market and household budgets. Also, the market pricing for RBA was aggressive with a 4% peak priced in.
The US economy is more domestic driven, especially with lower dependence on China’s activity levels, and therefore has significantly higher room to whether the central bank tightening. It is also worth keeping in mind that the RBA meets every month, so it can get a lot of tightening done even with 25bps rate hike every month, compared to some of the other central banks that meet less often. The Reserve Bank of New Zealand’s 50bps rate hike today has rather confirmed that we are still some way off from a pivot from the Fed or other global central banks.
Some things are breaking
Well, we have often heard the saying that Fed will hike until something breaks. And things are breaking, from a slow break of the Japanese yen to the quick crash of the UK Gilts market. Potentially, something breaking in the financial markets could make the Fed pivot faster than the domestic economy breaking, as it appears now. It will be important to monitor the broader measures of financial stress, such as the ECB Systemic Risk Indicator as highlighted by my colleague here. For now, we do not see any systemic risks, and a larger pool of money than say the UK pension fund industry, will have to be in trouble to really spell pivot for central banks.
Fed is in the “Volcker” mindset
Fed’s Chair Powell has invoked his inner Volcker with his message at Jackson Hole getting sharper about inflation. It is clear that persistently high inflation is damaging to central bank credibility and so they will want to know inflation is well and truly crushed before making any moves to pivot, thereby avoiding any mistakes of the past where an early Fed pivot made the fight against inflation that much harder. History has shown that pivoting too early can lead to resurgent inflation as was the case in the 1970s (see chart below). Unlike his predecessors, Fed Chair Volcker kept interest rates at elevated levels after inflation peaked, and only pivoted in 1982, having started raising rates in 1979.
The Fed officials have been giving out a clear message lately on the goal of getting inflation under control, without being concerned about the domestic economy or the turmoil in the global financial markets. While the two key indicators, Friday’s monthly payroll report and the monthly CPI data on October 13, could still distort the market pricing of the Fed’s message, that would make the Fed’s job that much harder.
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...