Markets over optimistic perceptions for rate cut.
From this FED chart, there are still plenty of liquidity in the market. ON RRP suppose to be an emergency fund & rightfully to be maintained at US$100B or lesser. However, this fund is still at more than US$1T. Based on QT of US$950M per month, FED can still do QT for about another 10 months to bring down inflation & the cost of living provided there is no black swan or liquidity issue similar to March last year. Currently, there are enormous expectations that FED will cut rate as soon as March which is slightly too early since QT can still continue till 4th quarter. Hence, do we expect FED to cut rate & at the same time when QT is still on-going?
Next,
Federal Reserve funds rate (3 months): 5.33%
Looking at the 3 months (5.47%) & 6 months (5.24%) treasury bills above, the yield that are derived from trading on 5th Jan’2024 clearly tell us that there is no need to cut interest rate. Whereas there will be a need to cut interest rate by 0.5% as compare to the 1 Yr treasury bond (4.84%).
In conclusion, to normalise ON RRP & from the yield for 3/6/12 months treasury bills/bond, we expect the FED to cut interest rate only on the 4th quarter of this year.
Markets have been running up since 30/10/23 (Mon) on high hope of interest rate cut in March & 1.5% cut for Year 2024. What will happen when markets realise that they have been scammed by JP & need to revise their rate cut expectations?
Note: This is just a sharing based on market liquidity. Please DYODD as there are more factors that will affect the movement of the markets. Also, there is no suggestion to long or short the markets.
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