Ghost of Igloi wrote:
GDP coming in just fine at 3.1%.
Low unemployment, GDP solidly rising, and the Fed keeping rates probably unchanged all year. Until one of those things changes then we'll probably stay the same range-bound course all year.
Don't futures suggest an 85% likelihood (or something like that) of the fed dropping rates this year?
I think I saw that. That could kick up the market.
OK I just checked ZQ futures for December and yeah looks like most money is on a rate cute by then. But what's weird is that it's sort of bearish too.
The economy will be so bad (stocks go down)!! that the Fed will have to cut interest rates (stocks go up)!! Or maybe it's an inflation gamble, but at least a few FOMC members have said they might have to let inflation run over the 2% target a bit before touching rates again. No one knows where this economy is going
Seems to me the reason for Fed cut is that inflation will be so subdued that rates can and will fall, even if the economy isn't overheated. So the fed will drop rates to prevent deflation because if that happens we are well and truly F'd.
The rate curve is certainly saying inflation is a dead dog.
Rates have already fallen. 10 Year Treasury down to 2.25% from 3.2+% in December. JGBs and the Bund at recent lows and nearing negative yields. All these rates are reflecting slower growth. If demand is saturated at this late cycle, it is hard to imagine cutting rates will stimulate further economic activity. Rates likely to stay capped and may continue to drift lower, reflecting lower growth and an inability of Central Banks to exert influence on markets.
rates falling don't necessarily reflect slower growth in the future.
falling rates may only reflect lower inflation in the future.
we all grew up with the idea that with growth comes inflation, but the last decade has shown that may not be true any more. Now we can have growth with very low inflation. Why? probably tech and the globalization of labor. Amazon et al are keeping costs down for everyone.
Those negative yields in Europe may be signaling deflation over there, not slowing growth or gov't manipulation.