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  • Traders See Just 50% Chance of Dec. Rate Cut

Traders See Just 50% Chance of Dec. Rate Cut

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Bloomberg Nov 18 09:03 · 16.6k Views

The bond market is currently uncertain, with ongoing discussions about a possible rate cut by the Fed in December, but strong Economic data is paring bets on a rate cut.

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Transcript

  • 00:00 You take a look at the bond market pricing here, the fact that the market cannot decide
  • 00:04 this morning it was a coin toss.
  • 00:06 This idea of a December rate cut.
  • 00:07 Do you think the Fed can make it there?
  • 00:10 I we think they can.
  • 00:11 I mean we actually think that they cut in December and I think this week's CPI,
  • 00:15 you know, number actually gave him a little bit of fuel.
  • 00:17 I mean, after that, I mean, what do they go in December or not really isn't the issue.
  • 00:20 It's really the 2025 that we're paying attention to.
  • 00:22 And right now the market we believe is a little bit too hawkish.
  • 00:25 It's only pricing in as of this morning,
  • 00:27 maybe 2 cuts, maybe a little over because
  • 00:29 you know, now it's really focused on
  • 00:31 tariffs, inflation expectations.
  • 00:34 So they've really taken out these cuts and credit growth has been stronger, right?
  • 00:36 We had,
  • 00:37 you know, 2.8% in the third quarter.
  • 00:39 We have Atlanta Fed GDP now
  • 00:41 while early tracking about 2 1/2%.
  • 00:44 So we do think, you know, growth is stronger, but the Fed has a long way to go to even get near towards their neutral,
  • 00:49 even versus our neutral, which is 3 1/2 percent.
  • 00:52 So we do think they go in December.
  • 00:54 So
  • 00:54 Stephanie, before I have you comment on 2025, I'm equally interested to hear what you think there.
  • 00:59 Do you think December can happen for a rate cut?
  • 01:02 We actually agree with Leslie.
  • 01:04 You know, we do believe that December is still in play.
  • 01:07 We do think that it, you know, the Fed has said that they're data dependent.
  • 01:10 I don't think any of that has changed.
  • 01:12 I think what has changed is, you know, the, the US presidential election and a lot of the various policies really has taken the focus away from
  • 01:20 monetary policy and what's actually driving that to things like the tariffs and and that's really taking the eye off
  • 01:26 off of the ball.
  • 01:26 We really think that December's still in play.
  • 01:28 Well, then Stephanie, to
  • 01:30 the point of 2025, how much do you think that the Fed can't cut next year, particularly with the tariff policy proposed by the president-elect?
  • 01:38 Well, I mean, at this point it's, it's really difficult to talk about a policy that as you get to be written, right.
  • 01:44 So we, we've heard talking points of a policy,
  • 01:47 but at some point we're going to get more clarity.
  • 01:49 At at this point in time, we're still calling for about 1%
  • 01:53 worth of cuts.
  • 01:54 In 2025, we're thinking about four cuts, 1/4 of a point each time.
  • 01:58 And we really think the Fed is going to keep that neutral rate right at about 3 1/2%.
  • 02:03 And you know, I think right now the market is also talking about that rate being higher.
  • 02:06 And perhaps that is driving, you know, why we aren't seeing
  • 02:10 as many cuts priced into 2025 and the December cut now nearly off the table.
  • 02:14 How do you
  • 02:16 take stock
  • 02:17 of the proposed policies,
  • 02:18 Leslie?
  • 02:19 Well, I think to, to Stephanie's point, there's policies and there's, and there's implementation.
  • 02:23 And I think you have to take, you know, Trump seriously, but not necessarily literally.
  • 02:27 So we have to wait and see in terms of how these policies play out.
  • 02:30 But to her, .1 of the reasons why that we have
  • 02:33 4 cuts in 2025 or 100 basis points
  • 02:36 is because we believe that the Fed looks through
  • 02:39 the,
  • 02:39 you know, temporary inflation caused by tariffs, right?
  • 02:42 Fiscal stimulus is a different story, right?
  • 02:44 When you have that kind of growth and inflation from stimulus, it's much different than via tariff.
  • 02:49 So we think that they
  • 02:50 they look through that and they continue to cut.
  • 02:53 With all that said, you're looking at a 10 year now at 4:45 and there has been so much movement in the in the longer end of the curve.
  • 03:01 Stephanie, what do you do
  • 03:03 at the longer end?
  • 03:03 Do you buy at these levels?
  • 03:07 We, we like Treasury yields right now.
  • 03:08 We like where they are.
  • 03:09 We think it's a good entry point.
  • 03:11 We're also, you know,
  • 03:12 right now loving what we're seeing in terms of fundamentals in the investment grade market.
  • 03:16 We think the fact that yields have gone up should be seen as a good entry point for those that are looking to establish a fixed income position, add to their fixed income position.
  • 03:25 We don't necessarily believe that,
  • 03:28 you know, where rates are right now, where they're going to stay.
  • 03:30 We do believe that this has a lot to do with the fact that the the market is now, like you said, just moving away from the December cuts.
  • 03:37 I think a lot more bullish in terms of what the expectations are
  • 03:41 regarding what the tariffs will do
  • 03:43 to the overall economic environment and really just downplaying, I think, you know, monetary policy and what the Fed can and has told us that they will do.
  • 03:52 Leslie, what's the risk here that the 10 year gets meaningfully higher from here?
  • 03:55 You know, that's that's one of the points when you say, are we buying like we're buying, but only up to the intermediate part of the curve.
  • 04:00 We don't like that back in part
  • 04:02 because I think partially because of the risk is, is that the fixing market's forward-looking.
  • 04:05 It's very speculative.
  • 04:06 So the risk is, is that they cut the market says you shouldn't be cutting because inflation expectations higher and yields actually move higher, right, Similar to what we saw in September.
  • 04:16 So part of that is risk to the market when we push towards that
  • 04:19 potential 5% that we saw in October 2023.
  • 04:22 So could we see that level in 25?
  • 04:24 Yes.
  • 04:24 Could it be sustained?
  • 04:26 No, it couldn't.
  • 04:26 And when we think about whether or not it goes above 5,
  • 04:30 you know, and it's a sustained given how tight credit spreads are, given, how everyone sort of has the same play on in terms of
  • 04:36 I want that yield, I want that carry.
  • 04:38 If you start to move substantially higher, really that's the risk.
  • 04:41 You know, it's interesting.
  • 04:42 We have to listen back to what Fed Chair Powell said just this week.
  • 04:46 He'd given a hawkish tone on for the rate cuts ahead.
  • 04:49 To your point,
  • 04:51 the economy is not sending any signals that we need to be in a hurry to lower rates.
  • 04:56 The strength we're currently seeing in the economy gives us the ability to approach our decisions.
  • 05:00 Carefully.
  • 05:02 Ultimately, the path of the policy rate will depend on how the incoming data and the economic outlook evolve.
  • 05:10 Stephanie, how do you see the push pull between monetary policy and fiscal playing out as we start to see the beginning of a Trump turn next year, particularly when we have seen such tensions brew in the campaign?
  • 05:25 Yeah, I think there's a there's a lot of things that we're going to be paying attention to.
  • 05:28 I think, you know, the tax policy is, is one that, you know, we we're going to be focused on.
  • 05:33 You know, based on what we've heard from the administration so far,
  • 05:36 it seems that, you know, maybe tax advantage products may take a hit.
  • 05:40 We may not necessarily
  • 05:41 see those in high demand.
  • 05:43 We talk about tariffs and we talk about the fact that, you know, that may actually, I think, you know, on its head may actually look like we might see a weaker dollar, but we in fact think that it may result in a stronger dollar.
  • 05:54 So that may also upend some of what we've been seeing here recently.
  • 05:58 And then when we think about, you know, the immigration side of things, right,
  • 06:01 you know, the US has seen declining growth rates.
  • 06:04 And, you know, a big change to immigration is also something that we'll have to pay attention to and all of the industries that are very much reliant
  • 06:12 on the migrant
  • 06:13 population for, you know, their day to days.
  • 06:16 So immigration, trade, taxes, Leslie, when you take kind of the, the
  • 06:20 mass amount of change that you might get next year, what's impacting the long and the most you think
  • 06:27 in terms of the longest will be the fiscal side in terms of,
  • 06:30 you know, obviously they're they're all going to have an impact.
  • 06:32 You know,
  • 06:33 tariff, immigration, they're all going to have an impact obviously on
  • 06:36 inflation, inflation expectations.
  • 06:38 Obviously immigration is also going to have an impact on the labor market.
  • 06:41 But really what happens on the fiscal side, I think it's going to have the longer impact in terms of how this plays out.
  • 06:46 You're going to have, you know, dueling forces for a while
  • 06:49 with tariffs being inflationary, but pulling down growth, but any fiscal stimulus,
  • 06:53 you know, pulling up growth.
  • 06:54 So I think that's really going to be the difference, but also really depends on
  • 06:57 how much they can get
  • 06:59 actually get done.
  • 06:59 And that's really what's unknown
  • 07:01 and also the duration of what they get in.
  • 07:04 So that's going to be, you know, what we look at going forward.
  • 07:06 And unfortunately it's going to be a lot of speculation.
  • 07:08 I know you,
  • 07:09 you showed the move index, which has come down,
  • 07:11 right, But that was elevated for a very long time.
  • 07:14 And now that it's come down, because we have certain unknowns known,
  • 07:17 there's still a lot of unknown ahead.
  • 07:18 So we, we expect the market to be choppy.
  • 07:20 We think the market's going to be volatile for the next several months.