Markets Flash ‘Slowdown’, Fed Turns ‘Dovish’
The Fed is likely to deliver some response to the wave of risk aversion hitting global markets, according to JPMorgan Asset Management’s fixed-income Chief.
Policy makers can hardly ignore inversions showing up on the yield curve while a violent sell-off rocks US stocks on trade tensions, European political risk and falling Crude Oil prices, Bob Michele, CIO at JPMorgan AM said in an interview with Bloomberg Television.
“I would expect a dovish rate hike” at the 18-19 December meeting, Mr. Michele said. “I would expect some clarity that we are near the end” of the indicative tightening trajectory.
Fed Chairman Jerome Powell hinted in late November that the Fed may temper the pace of rate increases next year from the three projected by officials in September. Those forecasts will be updated when officials meet later this month.
The spread between 3 and 5 yr US Treasury yields turned negative for the 1st time in more than 10 years this week, a sign of vanishing confidence about the economic outlook.
“The Fed is certainly taking notice of the shape of the yield curve and they certainly don’t want recession expectations to start to pervade through the market,” Mr. Michele said. “If there’s an increasing preference for investors to buy 10-year securities at a lower yield than they could get in cash that’s telling you that there’s a material slowdown brewing.”
One way the Fed could buffer the impact of rate increases would be to signal the central bank is “open” to pausing its balance-sheet-reduction program. Signaling an outright hiatus in rate hikes at the December meeting “would be too much of a shock — I think they would lose credibility,” Mr. Michele said. “Getting to 3ish per cent by June, the markets could tolerate that.”
Crude Oil bounced near a psych mark at $50 bbl Thursday as OPEC struggled to forge an agreement on production cuts, good for bond Bulls.
Slumping Crude Oil “will reflect right back into inflation expectations and those are going to come down,” boosting prices for developed-market government debt along the way, Mr. Michele concluded.