Bond and Stock Markets Agree: Interest Rates Are Going Up, Just Not Much

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JPMorgan Chase boss Jamie Dimon says six or seven rate hikes are possible this year, which is more than the market expects.

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Brian Snyder/Reuters/Alamy

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On Wall Street, there is a perennial argument about the relativity of hard workers in the bond market compared to those in the stock market. The conclusion I draw from these colloquialisms is that both camps can glean something from each other’s point of view.

The past week provided some examples of differing perspectives on these respective sectors of the financial markets. Stocks continued their 2022 return as the Federal Reserve is widely seen as withdrawing from its ultra-accommodative monetary policy, long after acknowledging inflation outright for all others.

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Meanwhile, a sharp rise in bond yields turned resistance at their recent high tide mark. And when fixed-income markets agree about the certainty of future Fed interest rate hikes, they tend to top those rates at relatively modest levels. In addition, the market sees the Fed’s rate target well below inflation, even below the central bank’s long-term aspirational target of 2%, given the 7% increase in consumer prices over the past 12 months. leave.

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An array of Fed speakers basically reaffirmed broad market expectations of three one-quarter-percentage-point increases in federal-funds targets, from the current 0% to 0.25% range this year. By the end of the week, the fed-funds futures market had a . had about a 60% chance of Fourth hike till December, according to the CME FedWatch site, while JPMorgan Chase CEO Jamie Dimon said on Friday that there could be six or seven increases this year.

According to NatWest’s Economic and Strategy Report, the pricing of futures and forward contracts is growing at the same rate as Dimon’s – but only until the end of 2023. And then they forecast topping the fed-funds rate through 2024 in the 1.6% range. it will be much less 2.4% Peak in 2019 During Last Fed Hiking Cycle, and the Fed has its own expectations for further growth of 2.1% in 2024 and a long-term neutral rate of 2.5%. Published in its December policy meeting,

As for long-term interest rates, the futures market has seen only a modest increase of 1.94% in one year and 2.06% in two years in the benchmark 10-year note yield, the NatWest note said. Those estimates were up 1.77% late Friday, basically unchanged in the week, but down from the bank’s own forecast of 2.2% in the fourth quarter of 2022 and 2.45% a year later.

Corporate treasurers, bellwethers sensitive to rate trends, are back in the capital markets in what they see as very attractive terms. In the first nine business days of 2022, investment-grade companies have raised nearly $100 billion, while high-yield borrowers, a much smaller group, have raised just over $13 billion.

Yet expectations of a relatively small rate hike were enough for equities to last another week, with the Nasdaq Composite down nearly 5% since the turn of the year. One hypothesis might be that both markets see a limited scope for higher interest rates, perhaps because they will impact economic growth, or because of the fragility of the heavily indebted financial system. There may be relatively little difference between the stock and bond crowd.

Write Randall W. Forsyth at [email protected]


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