Market Betting on US Fed Starting Rate Cut Cycle in July, But Attitude towards Risky Assets Is Extremely Pessimistic, Here Is Why

Shortly after the US Fed’s interest rate hike in May, the market has begun to bet that the Fed will start the rate cut cycle in July, but there is almost no cheering for the gradual end of the rate hike cycle.

According to CME Group's FedWatch tool, there is a 91.5 percent chance of a pause in rate hikes at the June meeting and a 36.3 percent chance of a rate cut in July, compared with 24.3 percent a week ago.

The market generally believes that the interest rate hike cycle is coming to an end, but the attitude towards risky assets is extremely pessimistic, which is also in stark contrast to the previous seven interest rate hike cycles.

Bloomberg News pointed out: Historically, the last rate hike by the Federal Reserve has almost always driven the rise of high-risk assets such as stocks, but this rate hike cycle is accompanied by the "triple triplet" of economic recession, banking crisis and worrying corporate earnings prospects. The market may no longer be able to make optimistic expectations.

Strategists at major Wall Street banks are pessimistic: Morgan Stanley predicts the S&P 500 will fall to 3,900 by year-end as the economy slows. Goldman Sachs sees the S&P 500 ending the year at 4,000. Bank of America strategists are urging investors to "sell on the last rate hike" and expect the S&P 500 to end the year at 4,000.

The trend of credit tightening may continue and the economic recession will be delayed, which has become the basis for the market to expect a rate cut in July: Both ISM surveys of manufacturing and services fell, while surveys of U.S. consumer and small business sentiment also showed weakness, in line with signs that the U.S. economy is entering a recession. At the same time, given the strain on the banking sector and rapidly tightening lending conditions, there are now fears that a continued credit crunch will further accelerate the recession. Fed Chairman Jerome Powell's reference to tightening credit conditions in his post-rate decision press conference caught the attention of markets and Fed watchers and raised expectations for the upcoming Survey of Senior Loan Officer Opinion (SLOOS) .

ING noted that the ECB's most recent survey of bank lending suggests that the upcoming SLOOS survey is "unlikely to be satisfactory". The group stated: "The recent pressures on the banking sector will significantly tighten lending standards, which will have a significant dampening effect on economic activity and significantly reduce the need for further rate hikes."

How should the Fed on the edge of the cliff choose? However, the still strong job market and inflation that is difficult to cool down also make the Fed's choice more difficult.

As Wall Street News introduced earlier, the Fed may actually prefer to see a less strong employment data in May, which would help the Fed's efforts to slow inflation. The Fed's fantasy is that interest rates at this level are already almost tight enough, and this, combined with a possible credit crunch from a banking crisis, could help the Fed achieve a sort of soft landing: inflation falls when there is only a modest rise in unemployment rate. However, that vision was interrupted by an unexpected pick-up in employment and wages, with market analysts saying the strong jobs report "put the Fed in a tough situation." Sean Snaith, director of the Economic Forecasting Institute at the University of Central Florida, said: Interest rates will have to stay high, and this strength in the labor market makes it harder for the Fed to keep lowering inflation.

Roger Hallam, global head of rates at Vanguard Asset Management, said that while the Fed's rate path hinges on upcoming inflation data, "the Fed does recognize that there are significant pressures on the banking sector and there are still significant challenges for them to address."