Société Générale's Albert Edwards Ponders:"Is The Market Right To Expect An End To Fed Tightening?"
From ZeroHedge:
While the G-20 summit starting this Friday is certainly the week's
top market-moving event as investors and pundits will be closely
watching the outcome of the meeting between Trump and Xi for any signs
of a thaw in diplomatic relations and trade war rhetoric, just as
important will be speeches by the Fed chair Powell and vice-Chair
Clarida over the next two days for some much needed guidance on the
Fed's next steps.
The reason: as the chart below shows is that following the recent
slump in the market, coupled with rising fears of an economic slowdown
in the US next year, traders have sharply cut their expectations for Fed rate hikes in 2019, and
from as high as 60bps two months ago, markets now price in just 29bps
of rate hikes in the coming year, or in other words just over "one and
done", a sharp disconnect with the Fed's own dot plot which still
anticipates no less than 3 rate hikes next year. In fact, if the Fed
does not "guide down" to the market, odds are that risk assets are set
for another major negative surprise, pushing stocks even lower.
This is the quandary discussed by SocGen's Albert Edwards in his latest
note, in which he accurately observes that investors are beginning to
believe that the Fed is nearing the end of its metronomic tightening
cycle.
As shown above, Edwards notes that "market confidence that the Fed will
deliver the promised three rate hikes next year is evaporating and
recent CFTC data confirms that speculators have begun to unwind their
gargantuan short Treasury positions. And yet, despite wild gyrations in
the oil price, US CPI inflation expectations remain well anchored around
2% mirroring subdued actual inflation....
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