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The market may be a disadvantage for the Fed's trade.
That is what emerges from the April / May poll at the CNBC Fed, according to which 63% of survey respondents were predicting a rate hike by 2020 and some respondents feel that "it's a good thing." a rate hike could and should occur this year.
"The Fed has clearly moved from being an autopilot to the Year of Patient," writes Art Hogan, chief markets strategist, National Securities, in response to the survey. "I think one of the biggest surprises for 2019 may well be the stabilization of global economic growth and a rate hike in the fourth quarter by the US Federal Reserve."
On the other hand, the futures markets for federal funds are trading with a probability of reducing rates by almost 80% in 2020.
The main difference between the markets and respondents to the survey seems to be related to their economic prospects. Respondents see their growth slow to 2.35% this year, after about 3% in 2018, but this remains above trend. And those polled estimate a 21% probability of a recession in the next 12 months, five points lower than the recent record set in February.
"Markets are irrationally pessimistic about the future, no recession is coming," wrote Chris Rupkey, chief economist at MUFG. "It is unwise to cut rates because of the weakness of inflation at the moment … The Fed is expected to resume its gradual pace of rate hikes later this year."
With stocks at unprecedented levels, they may have already cleared fears of a recession, but weak bond yields suggest worries are still weighing on fixed income markets. Respondents estimate that the 10 – year yield will increase to 2.75% by the end of the year from the current level of about 2.5%. And that dropped dramatically from the November poll, when forecasters were looking at a 3.5% mark over 10 years.
"The most likely solution is to take no policy action, no reduction or increase, so bond yields are likely to be in the lower end of their trading range for the year," said John Donaldson, Director of Fixed Income, Haverford Trust Co.
Some think the links are right
Certainly, some people think that the bond market may be right. One-third of the 45 respondents, including fund managers, economists and strategists, expect a rate cut in 2020.
"Interest rate markets are now predicting a recession probability of nearly 40% by 2020, which is in sharp contrast to the near-record level of US equities." Bonds tend to be anticipatory and the late actions, "wrote Guy LeBas. Chief Fixed Income Strategist at Janney Montgomery Scott.
Survey respondents estimate that the S & P 500 is close to 3,000 this year, up 1.3% from the current level, to reach 3,028 next year.
According to the economic outlook, 77% of those surveyed believe that the United States and China will conclude a trade deal this year, and few people think that a new ruling from the government is likely.
Tax cuts would increase potential GDP by almost 0.4% to 2.35%, while tariffs would reduce growth by almost half this year. The global slowdown could take a quarter of a point off US growth.
56% of respondents believe that the Fed remains on hold this year and that the average rate of funds remains around 2.4%.
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