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US rate strategists at Bank of America Global Research urged the broker’s clients to fade rate cuts that the market has started to price in recently.
According to Bloomberg’s data from this morning, the market is now pricing in nearly 100bp of rate cuts in the next 12 months.
“The recent payrolls report and today’s CPI report show continued strength which poses an elevated threat to the Fed’s objective of price stability, at least compared to the picture coming into the new year,” the strategists wrote in a client note.
BofA’s base case sees the Fed hiking 3 more times and then pausing.
“Before the recent bank failures, we were concerned that 50bp hikes could be back on the table given the strength of the data. The CPI report today was near consensus, but underlying services ex-shelter is not cooling as quickly as the Fed likely would want to see. This puts them on even higher alert and makes cuts in June less likely in our base case scenario of reduced contagion risk,” they added.
Conversely, the Fed may opt to pause in March. While this scenario is possible, the strategists add, it is still unlikely that the central bank will cut rates by June “given that 4.58% fed funds is relatively low compared to their median “dot” of 5.1% and that the evidence so far suggests that current levels are not sufficiently restrictive to control inflation.”
“We think rate cuts would have little value in addressing confidence in the banking sector around deposit safety,” they further stated in a note.
S&P 500 Futures are trading sharply lower in pre-market Wednesday, down 1.6%.
