The Irrational Interest Rate Cut Exuberance

seekingalpha10-09

Traders are consumed by an irrational interest rate cut exuberance, failing to understand the Fed's reaction function and repeatedly overpricing the pace and magnitude of the rate cut cycle.The market...

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You can become one too!","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4585":"ETF&股票定投概念","BK4581":"高盛持仓","TLT":"20+年以上美国国债ETF-iShares","BK4588":"碎股","IEF":"债券指数ETF-iShares Barclays 7-10年"},"translate_title":"非理性的降息热潮","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"IEF":0.9,"TLT":0.9},"content_text":"Traders are consumed by an irrational interest rate cut exuberance, failing to understand the Fed's reaction function and repeatedly overpricing the pace and magnitude of the rate cut cycle.The market's expectation of over 200 basis points of rate cuts by the end of 2025 continues to be undermined by solid economic data, including stable labor market statistics.Recent movements in U.S. Treasury yields and futures indicate uncertainty in the Fed's rate cut trajectory, against the backdrop of an upcoming presidential election and geopolitical tensions.Investors should remain cautious and avoid irrational exuberance about rate cuts, as historical trends and current price levels suggest higher yields and sustained economic strength into year-end.Editor's note: Seeking Alpha is proud to welcome Gains From Trade as a new contributing analyst. You can become one too! Share your best investment idea by submitting your article for review to our editors. Get published, earn money, and unlock exclusive SA Premium access. Click here to find out more » Eccles Building, The Federal Reserve, Washington, D.C. Douglas Rissing/iStock via Getty Images There's an old saying in Tennessee - I know it's in Texas, probably in Tennessee - that says, fool me once, shame on - shame on you. Fool me - you can't get fooled again. -Former President George W. Bush, Speech in Nashville, TN (September 17, 2002) Those who continue to bet on a hasty Fed rate cutting cycle can only wish that the former president's bungled quote was true. Because if it were, they would not continue, for now, the third time, overpricing the probability of a dramatic Fed rate cut cycle. If this does not kill the irrational interest rate cut exuberance, what will? Heading into the September non-farm payrolls release on October 4, 2024, traders had been pricing more than 200 basis points (bps) of Fed rate cuts into the market by the end of 2025. This instance was the third time, since 2023, the market had priced in such an aggressive cutting cycle. And after the 254,000 print, which came in well above the 150,000 consensus forecast, this was also the third time the market got it wrong. Fed Rate Cut Overpricing, in the SOFR 3-month futures market, beginning in March 2023 (TradingView) In March 2023, traders first overpriced the Fed's rate cutting cycle following the Silicon Valley Bank failure, which had little to do with high interest rates and more to do with the bank's mismanagement and irresponsible, self-important podcasters inciting a bank run. The market's expectations reset not long after SVB's failure when, later in March 2023, the Fed continued its rate hiking cycle. The Fed went on to hike rates 25bps for the final time in July 2023, as inflation was still running well above the Fed's supposed 2% inflation target. Second, in December 2023, traders once again overpriced rate cuts after Fed Chair Jerome Powell made a clear pivot toward the start of a rate cutting cycle. While Powell never committed to a specific date, his comments - echoed by several other Fed leaders - marked a clear end to the Fed's hiking cycle and signaled that the next interest rate decision would be a rate cut. The market wasted no time assuming that would happen at the Fed's March 2024 meeting. But after hot inflation prints in Q1 2024, coupled with a solid labor market, the Fed was quick to walk back its December dovishness. Traders were forced to reprice rate cut expectations for the second time, sending bonds and rates back to their mid-2023 levels. You'll never guess what happened next. On August 23, 2024, Fed Chair Powell spoke at the Fed's annual conference in Jackson Hole, Wyoming. Seemingly unaware of the market's reaction to his December 2023 pivot, Powell all but guaranteed an interest rate cut at the Fed's September meeting. And while plenty of confusion ensued, about whether the Fed would cut 25 or 50bps, the market wasted no time placing large bets on the Fed cutting interest rates more than 200bps, in total, by the end of 2025. How are those bets looking with the September payrolls release behind us? Not good. On Friday, October 4, the three-month SOFR futures (SOF) sold off (shown in the above chart), coupled with a smaller but similar move in Fed Funds futures. U.S. Treasuries all across the curve fell off a cliff. The largest move was in the 2Y yield (SHY), which rose to 3.926. If the U.S. economy continues to show strength, the yield curve could very well re-invert, further weakening the market's now half-baked expectation of a November Fed rate cut. Treasury futures painted a similar picture. Ten year futures (NASDAQ:IEF) slid 2.5 standard deviations to the downside, in the short run, but closed well into oversold territory. Positioning for a slight bounce at the beginning of this coming week would be consistent with Friday's Commitments of Traders report, which showed a further increase in commercial (primary dealer) longs. A rebound could also gain momentum if the Middle East war continues to devolve. Israel is still promising retaliation against Iran for last week's missile attack on Tel Aviv. That attack sent bonds higher before the late week selloff. Ten Year Futures Chart, as of Friday's close. (TradingView) Even with flight to safety in play, the bond market and interest rates will be climbing a steep hill into year-end. Bonds have historically struggled in October, driving yields higher month-over-month from September. The U.S. government will likely continue issuing an obscene amount of new debt. And if you haven't heard, there is also a presidential election next month between two candidates who have no plans to cut fiscal spending.  Be wary of getting fooled again.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"-1","news_tag":"Economic Data,analysis","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2474273591"}