UBS strategists mentioned there’s “excessive uncertainty” in regards to the extent of the Fed’s rate of interest cuts within the present cycle. The consensus amongst buyers is towards a smooth touchdown, however there’s appreciable ambiguity in regards to the Fed’s future actions, particularly in 2025.
Buyers’ views on the financial outlook are converging, resulting in decrease market volatility. The index, which measures volatility, and the MOVE index, which measures bond market volatility, each fell to their lowest ranges in late Could, earlier than the Fed started elevating rates of interest in March 2022.
“These are definitely imperfect measures to quantify the convergence of investor expectations,” UBS strategists wrote. “One may argue that low volatility is a greater indicator of investor complacency reasonably than convergence within the macro outlook. “
Latest financial information, particularly slowing employment progress, continued deflation and the Federal Reserve downplaying the potential for elevating rates of interest, have decreased macro dangers in Could, thereby restoring investor confidence in a smooth touchdown.
The important thing issue behind this convergence of views is the narrowing path of the federal funds price this yr, in addition to the coverage charges of different main central banks. Presently, the market expects the Federal Reserve to chop rates of interest roughly 1.5 occasions earlier than the tip of the yr.
The strategists famous that “it’s unlikely that there can be greater than two price cuts, and no less than none, which implies the magnitude can be small.”
They added: “If funds charges are comparatively steady in the intervening time, rate of interest volatility ought to fall, which ought to dampen volatility in different asset lessons.”
Trying forward, UBS believes that sooner or later in the summertime, the main focus will shift to 2025, with a wider vary of potential financial outcomes than this yr.
“Specifically, the dearth of readability on how restrictive present Fed coverage will really be means there’s a excessive diploma of uncertainty in regards to the extent of the Fed’s price cuts this cycle,” UBS mentioned. “In consequence, views on the Fed’s actions in the summertime of 2025 are more likely to diverge. It’ll disrupt the calmness of the market this summer season.”
