Markets are convinced the Fed is set to cut rates in July (and Jerome Powell of course confirmed as much on Capitol Hill last week), but what comes after that is anyone’s guess.
While many on Wall Street see a series of 25bp cuts (in July, September and December), market participants aren’t sure what to think. When BofA asked 62 fund managers with $792 billion in AUM how many Fed cuts they expected by the of 2021, the results were all over the place.
“The average of ca. 100 bp of cuts priced in reflects a multi-modal distribution of possible outcomes, with the mode of respondents looking for an insurance cut and a meaningful minority seeing the risk of rates falling to the zero lower-bound”, BofA writes, summarizing the responses, which make up part of the latest installment of the bank’s FX & Rates sentiment survey.
This is what confusion looks like:
(BofA)
As BofA alludes to, it’s notable that 12% of respondents see more than 150bps worth of cuts by the end of 2021. That likely reflects a belief among those survey participants that the Fed’s forthcoming “insurance” cuts will be insufficient to rescue the US economy from a deeper downturn.
Meanwhile, only a fifth of respondents think the ECB will be able to avoid plunging back down the accommodation rabbit hole. 79% of respondents believe some kind of easing is coming in September:
(BofA)
As you can see, more than a quarter of those surveyed expect QE from the ECB at the September meeting, either on its own, or combined with a rate cut.
In a true testament to how worried market participants are about policy ineptitude, when asked what can lift breakevens across the pond, only 15% cited monetary policy.
(BofA)
Hilariously, 18% said “nothing” in response to the same question. That is, nearly a fifth of asset managers controlling almost $800 billion believe that there is no force on earth powerful enough to keep Europe from succumbing to a deflationary mindset.
Suffice to say none of the above says much about the market’s faith in central banks’ capacity to reflate.
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If this is the case, whay aren’t Treasuries rallying on this sentiment? A 100bp cut over the year would make current 10 yrs for example yield monsters.