Fed expected to stick with hawkish rate hikes until data show further slowing in inflation.
– As U.S. inflation is expected to continue to fall, the Fed may suspend rate hikes and possibly even cut rates in July, which is bad for the dollar and good for safe-haven assets like gold. Therefore, we can consider shorting the dollar and going long on gold.
– The US stock market may face more volatility and downward pressure due to the US banking crisis and the risk of debt ceiling. Therefore, we may consider shorting U.S. stock index futures or options, or buying Volatility Index (VIX) related products.
– As the U.S. short-term Treasury yield curve is misaligned, reflecting market concerns about debt default. Therefore, we may consider shorting Treasuries maturing before the default trigger date and going long Treasuries maturing after the default trigger date to profit from the normalization of the yield curve.
The original article is as follows:
Caixin, May 12 (Editor Dash) – Long-term U.S. Treasury yields fell Thursday after the day’s release of a further slowdown in the U.S. producer price index (PPI), which bolstered expectations that easing inflationary pressures will lead the Federal Reserve to pause interest rate hikes in June.
Meanwhile, while hawkish Fed officials are still shouting, a range of market risk factors, including the banking crisis and the debt ceiling, are causing traders to continue to heat up expectations for a Fed rate cut in July!
Market data show that U.S. bond yields of all maturities generally weakened overnight, with long-term yields falling relatively more significantly. By the end of the New York session, the 2-year U.S. bond yield fell 1 basis point to 3.91%, the 5-year U.S. bond yield fell 2.6 basis points to 3.361%, the 10-year U.S. bond yield fell 5 basis points to 3.393%, and the 30-year U.S. bond yield fell 5.8 basis points to 3.740%.
Minneapolis Fed President Kashkari said Thursday that inflation is still too high despite a slowdown, which means the Fed will have to maintain tighter monetary policy for a longer period of time. Inflation has declined, but remains well above our 2% target level,” Kashkari noted. We’ve seen a slowdown in wage growth nationally, but the picture is mixed.”
The Fed’s hawkish official’s remarks, however, apparently did not change market interest rate pricing much overnight, as PPI data released earlier further deepened expectations that U.S. inflation is expected to continue to retreat.
Data released Thursday by the Bureau of Labor Statistics showed that the final demand producer price index (PPI) rose 2.3 percent year-over-year in April, the smallest gain since early 2021. The indicator rose 2.7 percent in March.
This comes after data released Wednesday showed that the year-on-year rise in the U.S. consumer price index (CPI) fell below 5 percent in April for the first time in two years, paving the way for the Federal Reserve to pause its year-long cycle of interest rate hikes.
“The U.S. inflation situation is improving,” said Tom di Galoma, managing director and co-head of global rates trading at U.S. brokerage BTIG, “and the Fed may have ended its tightening policy.”
For now, traders almost universally expect the Fed to leave rates unchanged at its next rate meeting in June. Chicagoland’s Fed Watch tool shows that the Fed will stay put at that time with a 92.8% probability, and the probability of another 25 basis point rate hike is only 7.2%.
And right now, many market participants have even turned their attention to the July meeting in advance, overnight interest rate swap market bets on the probability of the Fed cutting rates in July once touched fifty percent.
In the history of the Federal Reserve, the last time in less than three months after the rate hike on the “face” of the situation, but also back to the 1980s, so it can be said to be extremely rare. However, although the Federal Reserve officials also believe that the year is unlikely to cut interest rates, but with the banking crisis and debt ceiling haze continues to shroud the market, investors are still increasing their bets on the Federal Reserve to cut interest rates early.
The banking crisis and debt ceiling haze continue to loom over the market
On Thursday, the situation of the U.S. banking industry is still worrying many industry insiders. The KBW regional bank index also fell 2.4%.
The data showed that Westpac Hopewell saw deposit outflows of about 9.5 percent in the week ended May 5, with the bank adding that most of the outflows occurred on May 4 and May 5, largely triggered by news reports that it was considering a sale.
Susannah Streeter, head of funding and markets at investment broker Hargreaves Lansdown, said, “Concerns remain about the fragility of financial markets as yet another regional bank takes urgent action in response to customers fleeing …… “
Michael Metcalfe, head of macro strategy at State Street Global Markets, noted that “there is a pull and push relationship between micro factors (such as reports of declining deposits at certain banks) and macro hopes that interest rates will top out and eventually come back down. “
In addition to risks in the banking sector, the increasingly approaching U.S. debt default trigger date has also continued to make it difficult for investors to catch their breath lately. U.S. Treasury Secretary Janet Yellen (Janet Yellen) warned earlier this month that the U.S. government could run out of money as early as June 1, and uncertainty surrounding the U.S. debt ceiling continues to cast a shadow over markets.
JPMorgan Chase CEO Jamie Dimon (Jamie Dimon) warned Thursday that the debt ceiling crisis may trigger market “panic”, the bank has begun to call a “war meeting” for the U.S. debt default. And before he made these remarks, former U.S. President Donald Trump urged Republican lawmakers on Wednesday to allow the government to default unless Democrats cave in to “massive” spending cuts.
International Monetary Fund (IMF) spokeswoman Julie Kozak said Thursday that if the United States defaulted on its debt, it would have a very serious impact on the U.S. and global economy. The potential consequences of a U.S. debt default would include higher interest rates and broader instability.
Currently, the yield curve on short-term U.S. Treasury bills is completely misaligned. As a result of the massive rush by investors, yields on secondary market Treasury securities have plunged in the run-up to the “X date” (most likely June 1) when default is triggered. And due to the extremely high risk, the yield on Treasury bills with a maturity of about one month was as high as a staggering 5.5%.
In addition, in the equity options market, the demand to hedge against the risk of a large increase in volatility reached its highest level in five years. The cost of hedging a market decline of about 10% or one standard deviation was the highest in a year. Demand for tail risk hedging rose sharply to the highest since the height of the banking sector turmoil in March.
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