"Fed Early Rate Cut to Be Wall Street's 'Dumbest' Bet"

Interest Rate Futures Market, Less Than 50% Expectation of Rate Cut in March

A survey has revealed that the market's early rate cut expectations surrounding the U.S. Federal Reserve (Fed) will be Wall Street's most foolish bet this year. The March rate cut expectations in the interest rate futures market, which once approached 80%, have also dropped below 50%.

[Image source=Reuters Yonhap News]

According to a Bloomberg Market Live Pulse survey on the 22nd (local time), 66.4% of respondents identified the bet that the Fed would cut rates early as the "most foolish trade." This was followed by dollar selling at 20.5% and oil rebound at 13.2%. Bloomberg reported, "This shows growing unease on Wall Street that emboldened bulls are going too far with speculation around the Fed's dovish (monetary easing preference) pivot."

The market's expectation that a rate cut could be implemented as early as March has already weakened. According to the Chicago Mercantile Exchange (CME) FedWatch, the interest rate futures market currently reflects about a 41% chance that the Fed will cut rates by at least 0.25 percentage points at the March Federal Open Market Committee (FOMC) meeting after holding steady in January. This figure has clearly dropped from the 80% range a week ago. The timing of the Fed's first rate cut has been pushed back to May.

This is attributed to a series of hawkish (monetary tightening preference) remarks from Fed officials ahead of the January FOMC regular meeting, the first monetary policy decision of the year, indicating that the market's expectations for a March rate cut are excessive. Mary Daly, President of the San Francisco Federal Reserve Bank, said on the 19th, "It is premature to think that a rate cut is just around the corner." Raphael Bostic, President of the Atlanta Fed, also predicted that the first rate cut would likely occur in the third quarter.

Janet Mui, Chief Market Strategist at RBC Bruin Dolphin, analyzed that the reacceleration of inflation in some major countries and still-robust U.S. employment data are significant challenges to market expectations monitoring the direction of future monetary policy. He said, "The market's early rate cut and the number of cuts expected could not coexist with the soft landing outlook." He pointed out that as economic indicators worsen, concerns about the economic outlook grow, while at the same time, the market's early rate cut expectations increase.

Bloomberg noted, "More than two-thirds of respondents to this survey said the New York stock market rally confirmed at the end of last year now looks like a bad omen," calling it "evidence that market participants became optimistic too quickly." It explained that the early rate cut expectations rapidly spread at the end of last year, causing market sentiment to shift sharply from risk-off to risk-on. The media also pointed out that although respondents still prefer stocks (54%) over bonds (46%), their optimistic attitude toward stocks is less than it was in November last year.

Matt Mealy, Senior Market Strategist at asset management firm Miller Tabak, said, "It will be much harder for the stock market to maintain today's high valuation levels," adding, "Too many investors equate the end of rate hikes and the start of rate cuts with a return to the 'era of free money'." The survey was conducted from January 15 to 19.

This week, key data such as the December Personal Consumption Expenditures (PCE) price index, the preliminary fourth-quarter GDP growth rate, and Purchasing Managers' Index (PMI) will be released, which are inflation indicators preferred by the Fed. As the Fed officials enter a blackout period ahead of the January FOMC and refrain from public comments, investors are expected to gauge the future economic and monetary policy direction through these indicators.

The core PCE for December, to be released on the 26th, is expected to rise by 0.2% month-over-month, slightly exceeding the previous month's increase. However, it is forecasted to show a slowdown with a 3% year-over-year increase. The preliminary U.S. fourth-quarter Gross Domestic Product (GDP), released a day earlier, is estimated to have slowed to around 1.9%. In addition, this week will see earnings announcements from big tech companies such as Tesla, Intel, and IBM.