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Market Anticipations: A Tale of Over‑Eager Expectations
If you skim the charts today, you’ll probably feel a rush of déjà vu—markets are once again playing the “Fed will slash rates fast” card. The narrative is that policy easing is coming sooner and deeper than most analysts are comfortable with.
What the Numbers Are Saying
- By September, a 25‑basis‑point cut is almost guaranteed in the market’s eyes.
- A bigger 50‑bp shift? A one‑in‑four chance.
- Year‑end expectations nail down a total of just over 100 bp of easing across the remaining FOMC meetings.
- By mid‑2025, the curve shows almost 200 bp of cuts, implying rates will hit neutral in less than a year.
Sounds like a quick‑fire special, right? Turns out it’s not that realistic. We’ve seen this pattern before, and markets often misjudge the timing of policy changes.
Why the Current Pricing Might Be Setting a Ridiculous Target
- Labor market windfall—July’s jobs report did ease a little, but the 3‑month payrolls average (+170k) is still the lowest in three years, a PAWN against the 2018‑2019 backdrop.
- Unemployment climbed to 4.3%, hitting a four‑quarter high. Yet this spike is partially due to an enlarged labor force, not a sudden wave of layoffs.
- Temporary layoffs jumped by 249k, courtesy of Hurricane Beryl—a weather anomaly rather than an economic one.
- Both initial and continuing jobless claims have been falling, suggesting the July uptick is a fluke that will likely reverse by September.
- Bottom line: the U.S. labor market isn’t “soft” as the press may think.
Inflation: “Toward” 2 % Isn’t the Same as 2 % Yet
Chair Powell confirmed that headline inflation is headed toward the 2 % target, but that’s not a guarantee. Service prices still climb (~5 % YoY in July), and for a rate cut to be safe, the Fed must ensure inflation can sustainably sit at 2 %. If earnings growth revives, or a geopolitical event like an oil price surge occurs, the inflation target could be jeopardised.
Economy Still Cooking, Despite All the Buzz
- GDP expanded >2 % at an annualised pace in 7 of the last 8 quarters.
- Retail sales rose 1.0 % MoM in July.
- The ISM services PMI keeps a healthy expansion.
All this resilience indicates that a dramatic rate cut is unwarranted. The FOMC will likely tread carefully, sticking to modest quarterly cuts (25 bp) at best.
Impact on Forex, Treasuries, Gold, & Equities
FX – The Dollar’s Dilemma
A more hawkish Fed mindset, perhaps heralded by a stronger August jobs report, could lift the U.S. dollar from its year‑to‑date lows. The dollar remains the favourite among G10 peers in this “buy‑growth” environment.
Treasuries – Front‑End Vulnerable, Long‑End Resilient
- Short‑term U.S. Treasuries may see a reversal if the Fed steps up, swinging the dollar higher.
- Long‑term bonds appear better priced, assuming inflation takes longer to return to 2 %.
Gold – Almost Parking at a New High
Gold’s recent gains have stalled just shy of a fresh record. While burgeoning EM central bank flows help the metal, a renewed Treasury sell‑off could dent the price.
Equities – The Fed Put is Still Solid
A hawkish outlook won’t dramatically derail stocks. 2024’s market narrative rests on the Fed’s backstop: if conditions worsen, the Fed can cut faster or deeper. Knowing the Fed has ample leeway keeps investors comfortable, limiting equity dips to buying opportunities.
In short, the markets’ rapid‑cut expectations may be playing a risky hand. Once reality catches up, the dollar, Treasuries, and gold could experience a brief pullback, while equities remain resilient, buoyed by the confidence that the Fed can still swoop in if needed.
