Watch time: 3 minutes 30 seconds
Stephen Fitzsimmons, a member of our BlueBay Fixed Income team, discusses how different data readings over the past week moved markets, as investors seek clues to future Fed moves.
Summary points:
- Chairman Powell remained steadfast in keeping the door open for rate cuts, depending on incoming data
- We believe the risk that a rate hike, as opposed to a rate cut as the next move, is extremely low.
- In addition to the FOMC, soft jobs numbers further supported this rally in both risk and rates.
- Markets like this reinforce to us the reactionary nature of investor sentiment.
View transcript
Hello and welcome back to the Weekly Fix, my name is Stephen Fitzsimmons, Institutional Portfolio Manager with RBC GAM’s BlueBay Fixed Income team.
Last week we saw a bevy of inbound US economic data whipsaw both risk and rates back and forth as investor sentiment shifted rapidly. On Wednesday, the first of May, Fed Chair Powell and the FOMC left the overnight fed funds target rate unchanged. This was not a surprise. However, it was interesting to hear that although Powell acknowledged the fact that rate cuts may not be imminent – he remained steadfast in his press conference in keeping the door open for rate cuts later in 2024. He maintains that the Fed will be highly data dependent and any potential rate cuts would only come after signs of inflation are sustainably trending lower. Pace of Fed balance sheet run off has been adjusted with the monthly redemption cap for Treasurys moving from $60bn to $25bn. MBS limits were left unchanged. When asked whether financial conditions have to tighten further for inflation to come down, he refused to make the connection. His expectation remains for inflation to come down over the remainder of the year, although arguably with less confidence in that view than before first quarter data was printed. We believe if April CPI were to disappoint again, for the fourth consecutive print, a higher for longer narrative around rates could surely take hold. That said, we believe the risk that a rate hike, as opposed to a rate cut as the next move, is extremely low.
Interestingly, rates rallied through the balance of the week. The 2-year Treasury had been as high as over 5% in recent weeks – a level at which we expressed interest in a 2s30s steepener trade. The level on the 2-year is now hovering right around 4.8%, which represents a fairly significant rally at this part of the curve. In addition to the FOMC, soft jobs numbers on Friday further supported this rally in both risk and rates to close the week. With nonfarm payrolls coming in at levels that indicate the softest labor market in 6 months – broad investor sentiment has certainly shifted back toward the narrative that rate cuts are possible.
Markets like this reinforce to us the fairly reactionary nature of investor sentiment. And the potential hazards inherent in following the herd without first a strong degree of skepticism. We tend to take incoming data and Fed speech with grains of salt and read through the numbers and rhetoric to extract the important bits of information – categorizing what we believe and do not believe and taking a conviction-based approach. We remain steadfast in our view that, data permitting, one or two cuts are possible in the tail end of 2024… a view we have held since last year.
Thank you for your attention!
