Archive

Policy Rate Reversal Warnings

• Rate hikes are unlikely to resume unless forthcoming cuts prove premature. Cutting outside recessionary regimes has historically been prone to reversals to higher peaks.
• 1998’s cuts followed a shock that failed to prove recessionary. Fed cuts in 1967 sowed the seeds of a severe inflation problem. Both cutting cycles were more than reversed.
• Independent ECB hikes in 2008 and 2012 were rapidly proven policy mistakes. The BoE’s single 2005 cut was also wrong. Hopes that 2024 is benignly like 1989 may be misplaced.

By Philip Rush

Hedge in May and Go Away

• A sharp rise in market rates drove down equity prices in April. The correlated move was consistent with our suggestion before Easter to hedge the downside with equity options.
• We now believe the front end is broadly flat enough, so we have turned neutral on rates relative to the market despite being more hawkish than the consensus on the BoE.
• The potential for market expectations to overshoot again, extending the bearish trends, means hedging with options may still appeal over selling or hoping for recovery.

By Philip Rush

US Policy Rate 5.5% (consensus 5.5%) in May-24

• The FOMC unsurprisingly held the federal funds rate steady at 5.25-5.5%, reflecting ongoing economic strength paired with higher-than-expected inflation, complicating efforts to reach the 2% inflation target.
• The Committee also decided to slow the pace of its securities holdings reduction, a strategic move aimed at mitigating market stress and aligning with broader economic stability.
• The FOMC emphasizes its commitment to a data-driven approach, indicating that future interest rate decisions will closely depend on inflation trends and economic data. It maintains readiness to adjust policy as needed to balance growth and price stability.

Oil: When The Facts Change…

• Changing ‘facts’ in the Middle East and more widely are making prospects for the price of oil even more murky, as is underlined by the wide range of forecasts among market analysts. What is clear, however, is that the escalation in Iran/Israel tensions has skewed risks firmly to the upside.

By Alastair Newton