Happy Friday, traders.
Welcome to our weekly market wrap, where we look back at these last five trading days with a focus on the market news, economic data and headlines that had the most impact on the financial market – and may continue to into the future for the US Dollar and other key correlated assets.
Market expectations for Fed policy have swung dramatically over the past few months, from the higher-for-longer narrative to expectations of aggressive policy easing. With stronger-than-expected jobs and growth data this year and inflation still mild, investors have had to reassess their outlook for policy rates.
This week’s chart shows that the past five months have been a wild ride for policy expectations. In October, investors expected minimal change in interest rates in 2024. Sentiment then shifted dramatically after the Fed’s dovish pivot in December, sparking optimism for swifter policy easing this year. Soon after, markets turned increasingly dovish, calling for a rate cut by March and ~170bps of easing, more than double the Fed’s December forecast. Today, markets are pricing in a 79% probability of a rate cut by June and a total of 82bps of cuts for the year, suggesting at least three cuts with a chance of a fourth.
Bond and equity markets have responded differently to these shifts. Bond markets repriced in line with policy expectations, with the 10Y Treasury yield rising from 3.88% to 4.26% this year. As the Fed prepares to cut rates, current bond yields offer investors an attractive entry point to add duration and income. For equities, prices have continued moving higher with the S&P 500 up 21.9% since October and 6.9% year-to-date. So long as higher yields are being driven by expectations for stronger growth rather than higher inflation, equities should remain supported.
Thanks for reading! Have a great weekend.
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