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Stocks and bonds rise because the Federal Reserve ended its nearly four-year interest rate hike, worrying investors, who believe the central bank could exceed those expectations later this year.
Since the Fed meeting in January, a number of investors and traders have concluded that the central bank has not just suspended its rate hikes, but has completely completed them.
Some believe that the Fed's next decision could be to reduce the benchmark rate in the short term, which has not been done since December 2008, when the global financial crisis forced the central bank to reduce rates to nearly zero.
This move has destabilized some investors, who believe that much of the year's rebound in stocks and bonds has been fueled by rumors that the Fed will not raise rates in the foreseeable future. Loretta Mester, president of the US Federal Reserve Cleveland, said Tuesday that interest rates are expected to rise slightly this year assuming the economy is growing at the expected pace. Financial managers will once again review the Fed's interest rate and economic outlook on Wednesday, as the central bank is scheduled to release minutes from its January meeting.
The S & P 500 and the Dow Jones Industrial Average have risen since the close of their best month of January in decades, with both indexes rising about 10% in 2019 and around their highs for the year. . At the same time, the yield on the two-year Treasury note – which tends to move in line with interest rate expectations – has declined for three consecutive months, its longest run since 2013, according to Dow Jones Market Data. Yields fall as bond prices rise.
"It seems downright optimistic to expect nothing from the Fed in the next 12 months," said Isabelle Mateos y Lago, chief executive and chief multi-asset strategist at BlackRock. "When you look at the payroll data, it's not about an economy on the verge of a recession."
Much of the disagreement over the Fed's next rate change comes from its decision in January to remove the explicit reference to future rate increases from its monetary policy statement. Prior to the January meeting, the central bank had included this language in all its declarations since 2015.
This withdrawal, coupled with Fed Chairman Jerome Powell's comment that "the rationale for the rate hike has eased somewhat," has allowed Dow's industrialists to increase by 435 points, or 1 percent. , 8%, on January 30th. Betting on the course of monetary policy – show market prices in a 1.8% probability that the Fed is raising rates at least once by the end of the year, compared to around 13% a month ago, according to the CME group.
The Federal Reserve maintained its benchmark reference rate steady Wednesday and issued the clearest signal to date: the central bank could have reached the end of its latest round of interest rate hikes. Nick Timiraos explains. Photo: Getty
Gautam Khanna, fixed income portfolio manager at Insight Investment, said he was increasing the share of interest-rate-sensitive securities, such as Treasurys and mortgage-backed securities, in his portfolios since the end of the year. Last year. This is a response to the slowdown in global growth and the growing evidence that the Fed has raised its rates, he said.
There is "too much risk," Khanna said. "The lion's share of what the Fed is likely to do this cycle is already behind us."
However, a number of fixed income analysts believe that the Fed does not seem to have ruled out future rate hikes. Instead, the central bank simply indicated that she was pausing for the moment.
"The change in communication has basically gone from saying explicitly that further rate hikes were guaranteed, telling them," I do not know. "And simply," I do not know, "does not mean that there will be more rate hikes coming on," said Jon Hill, vice president and rate strategist. interest at BMO Capital Markets.
Some analysts remain skeptical of the Fed's rate hike: the economy seems much stronger than the Fed's latest decision to lower interest rates.
The US labor market has created jobs for 100 consecutive months, the longest such sequence in history. While inflationary pressures have remained stubbornly dampened for much of the past decade, giving the Fed little reason to accelerate its rate hikes, the tighter labor market seems finally to have begun to translate into a wages. The January Labor Department's jobs report indicated that wages had risen at least 3% year-on-year for a sixth consecutive month, on the back of the biggest increase in wages since the end of the recession. 2009.
"Some of the market players who are convinced that the next step is a reduction fail to recognize how tense the job market is and the fact that growth continues to outpace the trend," Hill said.
Some sectors of the economy are starting to show signs of weakness. The data indicates a slowdown in the housing sector. The Conference Board's measure of consumer confidence fell for three consecutive months, while a report showed Thursday that retail sales fell in December at the fastest pace since 2009.
Then there are variables such as the trade conflict between the United States and China that may exacerbate the slowdown in global economic dynamics.
"China will probably worsen before it improves and the US will feel the slowdown," said Andrea Cicione, head of macroeconomic strategy at TS Lombard, who believes the Fed will probably lower its rates by the end of the year.
Nevertheless, the global data indicate a slowing economy and not a clear degradation. This leaves bets on the market, especially for equities and shorter-dated treasury bills, vulnerable to a turnaround, analysts said.
"You do not necessarily want to assume anything in both directions," Hill said.
– Sam Goldfarb contributed to this article.
Write to Akane Otani at [email protected]
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