As usual, BofA’s Michael Hartnett gets points for style.
“No cuts, no glory,” read the title of the bank’s latest Global Fund Manger Survey.
The October vintage “screams macro capitulation, investor capitulation and crucially, the start of policy capitulation,” Hartnett said.
The key takeaway from this month’s survey, released on Tuesday, was that expectations for higher short rates are receding. The share of respondents who expect short-term (i.e., policy) rates to be lower in the next 12 months doubled from September to 28% (figure below).
Naturally, that meant the share expecting higher short-term rates fell again. It now sits at 59%, down sharply from last month and dramatically from the highs seen just prior to the onset of the most aggressive Fed tightening campaign in a generation.
This is crucial. For the “Big Low” (as Hartnett is fond of calling the eventual trough in equities), you need investor sentiment to coalesce around the idea that Fed cuts are coming. “FMS expectations of lower short rates was 5% in March, now 28%,” Harnett wrote, noting that the threshold to watch is 65% seen around prior “Big Lows.”
Terminal rate expectations have increased sharply consistent with market pricing. Survey respondents incorporated another two “normal”-sized rate hikes into their outlook this month versus September (figure on the left, below).
Again, that’s generally in line with market pricing, and I’d also note that, while still in the minority, a growing number of investors appear to believe rates will eventually exceed 5% (although I’d wager Mark Mobius is virtually alone in predicting 9%).
The percentage of survey participants who see the Fed’s hiking cycle ending in Q1 rose to 38% this month, suggesting some who previously believed the Fed would keep hiking into Q2 have pulled forward their expectations for a pause of the permanent variety.
Tellingly, “global credit event” is now seen as the second most likely reason for a Fed pivot behind a drop in PCE inflation (figure on the right, above).
The survey period coincided with the tumult in UK rates and associated margin calls and forced fixed income selling by the nation’s pension funds.
As much as I wish we could wish inflation away through force of will, would the Fed stop hiking if inflation keeps rising?
Volcker didn’t stop until rates reached 20 (prime rate) and the beast was well and truly dead.
Market participants lying in the tall grass, face paint on, staring through their scopes, just waiting for that pivot or pause or anything that rhymes with pivot or pause.
Fed speakers know this, and so they’re going through their speaking appearances with Taboo cards in front of them, listing all the words NOT to utter, for fear of being the guy/lady who accidentally starts the stampede.
It’s just been surreal. Even with Fed Funds normalizing, and the QE machine turned off, nothing seems “fixed” to me.
Pavlov’s Dog is still sitting there, patiently drooling.