U.S. interest rate update
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Due to the bleak economic outlook and concerns about the peaking of economic expansion have raised doubts about the path of monetary policy, traders have drastically lowered their expectations of the Fed’s rate hike in the coming years.
The price of Eurodollar futures, which traders use to bet on the direction of interest rates in the coming months, has risen sharply in the past three months, indicating that views are changing. As these prices have risen, the interest rates of the oppositely trending Eurodollar futures have fallen.
Price movements indicate that traders believe that the rise in US interest rates will be much lower than in April or May, when strong inflationary pressures allowed fund managers to prepare for what they thought might be a positive response from the Fed.
But even if inflation data continue to hit new highs — consumer prices in June rose 5.4% from the same period a year ago — the increase was accompanied by fears that the impressive economic rebound would eventually subside. This may test the extent to which Washington policymakers ultimately raise interest rates.
Although investors continue to believe that the Fed will tighten interest rates from around zero at the end of 2022, the implied interest rate in December 2023 has dropped to 0.69%. This is lower than 0.81% in mid-May and 0.94% in early April.
Going further, the expectations are even lower. Eurodollar transactions show that by December 2026, U.S. interest rates appear to only rise to 1.46%, which is almost a full percentage point lower than the 2.32% set by traders in April.
“The market is saying,’We think the rate hike cycle will begin, but we don’t believe it will be a full rate hike cycle. Inflation will not continue,” said Citigroup strategist Jason Williams.
Changes in interest rate expectations have penetrated other markets, the US$49 trillion US stock market is rapidly rotating, and long-term Treasury yields have fallen. The 10-year Treasury bond yield fell to 1.13% last Monday, the lowest level since February, and then rebounded.
Although the tone of Fed policymakers after the June meeting was not so moderate May start to rise in 2023 In the long run, it may reach 2.5%, and investors have questioned the strength of the global economic recovery. Investors pointed to signs of a slowdown in the Chinese economy and signs of weakening US consumer confidence data.
For some fund managers, the decline in U.S. Treasury yields confirms that growth will fade. This is why Ian Lyngen, a strategist at BMO Capital Markets, believes that the Fed will try to adopt a more dovish view at the next meeting.
“The global headwind represented by the Delta variable has not yet risen to the point where downscaling needs to be reconsidered,” Lingen said, referring to the Fed’s eventual end of its asset purchase program. “On the contrary, as the pandemic progresses, the road to increase in liftoff becomes longer.”
In the past two months, investors Reduce the bet on the company It is expected to benefit the most from the accelerated economic rebound and the country’s reopening, including small-cap stocks and stocks from economic leaders such as railway and shipping groups. Instead, they returned to one of their favorite industries in the past decade: large technology companies.
This is partly because fund managers believe that if the broader economic rebound slows, faster-growing companies, including those unprofitable groups whose valuations depend on future earnings, will at least continue to expand at a rapid rate.
Pramod Atluri, Portfolio Manager of Capital Group, said: “We live in a world where every asset class, whether it’s bonds, real estate, stocks or other assets, is backed by low interest rates.” “So, anything that affects these interest rate trajectories The factors — how low interest rates will be and how long they will last — can have a huge impact on every corner of the financial market.”
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