Reviewing Q1 And The FOMC

TL;DR

Despite the Fed's forecast of a rate hike for 2020, markets are discounting a 50/50 chance of a rate cut in the first month of next year.

Transcript

hello mark Ostwald from ADM Investor Services international I'd like to share a few thoughts on how the world looks ahead of the end of q1 and in the wake of that FOMC meeting this that we had this week so the best place to start is probably with where markets are now discounting the next rate move and how that actually contrasts quite sharply with... Read More

Key Insights

• ☠️ Markets are discounting a rate cut in the first month of next year, despite the Fed's rate hike forecast for 2020.
• 💪 The US 10-year yield reaching 2.5% suggests financial repression and contributes to strong performances in equities and credit.
• 😘 Low US Treasury bond volatility indicates a lack of concern for a more adverse environment.

Questions & Answers

Q: Why are markets discounting a rate cut when the Fed is maintaining a rate hike forecast for 2020?

Despite the Fed's forecast, the markets may have misunderstood their clear signaling. The slight downward revisions to GDP, neutral profile for inflation, and slight upward revision to unemployment forecasts may lead the Fed to sit on its hands and see how the world evolves.

Q: What is the significance of the US 10-year yield reaching 2.5%?

The 2.5% level represents the top end of the current band of Fed Funds rate target, indicating that we are in a situation of financial repression. This has resulted in strong performances in equities and credit.

Q: What does the low US Treasury bond volatility imply?

The low volatility suggests that despite the Fed's caution, there is no concern for a more adverse environment. Investors are chasing higher-performing assets to generate decent returns as US Treasuries offer low yields.

Q: How does the relationship between high-yield bond spreads and the S&P 500 support cautious investment behavior?

When high-yield bond spreads tighten, the S&P 500 tends to rise. However, if the spreads trend sideways, it indicates that investors are longer on bonds and underweight on equities. This caution may stem from the asset allocation for the quarter and may continue into the next quarter.

Summary & Key Takeaways

• The markets are currently discounting a 50/50 chance of a rate cut in the first month of next year, despite the Fed's forecast of a rate hike for 2020.

• The US 10-year yield has reached an interesting level of 2.5%, representing financial repression and leading to strong performances in equities and credit.

• The US Treasury bond volatility is at a record low, indicating a lack of concern for a more adverse environment.