A pair of conflicting trade recommendations from strategists at major banks highlights the discord over the outlook for Federal Reserve interest-rate cuts.
(Bloomberg) — A pair of conflicting trade recommendations from strategists at major banks highlights the discord over the outlook for Federal Reserve interest-rate cuts.
Short-term interest rate futures are priced for the Fed to cut interest rates by about 150 basis points from September 2023 to September 2024. Strategists at TD Securities say that’s not enough, while those at Goldman Sachs Group Inc. say it’s too much.
Accordingly, the banks have advised taking opposite sides of the same trade in futures on the Secured Overnight Financing Rate, which track expectations for the Fed’s policy path.
Goldman strategists Friday recommended positioning for a less deeply inverted spread between the September 2023 and September 2024 contract rates. Those at TD Securities had advised wagering on an even deeper one the previous day.
TD expects Fed rate cuts totaling 275 basis points from December 2023 to September 2024 and for the market to move in that direction.
“We look for cut pricing to increase even further,” strategists led by Priya Misra said in a note.
Goldman, on the other hand, thinks investors have discounted too much easing and will think better of it in response to “a bounce in activity data” and still-elevated inflation readings, a note by strategists including Praveen Korapaty said.
“Some cuts currently being priced will come off,” they predicted.
The swaps market linked to Fed policy dates currently prices in a rate peak of about 5.14% in June, about 55 basis points of cuts by year-end and a combined 190 basis points of cuts by September 2024.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.