Is a Fed Pivot Finally on the Horizon After Six Dashed Anticipations Made by the Bond Market?

On Tuesday, the bond market experienced an epic turn as Treasury yields plunged in response to weak inflation numbers that ruled out any more rate hikes from the Federal Reserve, and accelerated the central bank's move towards lower rates.

The bond market's second thoughts should come as no surprise given the history of the last two years, during which inflation and policy rates took off.

According to Henry Allen, a macro strategist at Deutsche Bank AG in London, the market has attempted seven times to bring yields down in response to a Fed pivot over the previous two years, but none of the first six attempts proved pivotal. Let's break it down:

● 1. In November 2021, the appearance of the omicron variant of SARS-CoV-2 led traders to believe that COVID cases might again overwhelm health services, causing economic pain, which would indicate that central banks would not need to hike rates.

● 2. Late February/early March 2022 saw Russia invade Ukraine, leading to the Fed launching its rate-hike campaign with a 25-basis-point increase instead of a 50-basis-point increase. In retrospect, the invasion exacerbated inflationary problems while having little effect on economic activity.

● 3. In May 2022, investors became concerned about multiple growth worries, such as China's draconian zero-COVID strategy, the war in Ukraine, and the fact that the Fed had initiated a rate-hike cycle.

● 4. In July 2022, fears of an impending global recession and a decline in CPI fueled speculation of a dovish pivot from Fed Chair Jerome Powell, who stated that "it likely will become appropriate to slow the pace of increases." However, he pivoted back to the hawkish side at the Jackson Hole symposium in late August.

● 5. In late September/early October 2022, the financial crisis in the U.K., triggered by a budget from former Prime Minister Liz Truss and exacerbated by a pension crisis, resulted in markets pricing in fewer rate cuts for 2023.

● 6. In March 2023, banking turmoil stemming from the collapse of Silicon Valley Bank led markets to speculate that the Fed might be finished hiking rates.