Chronicle of Eric Sturdza bank rates.
Jerome Powell in Doctor No
The verdict is clear, the Republicans won everything, not just the White House. Thus, the Trump administration will be able to implement its candidate’s program without encountering any obstacles in its path, not even at the Supreme Court. This will undoubtedly boost confidence indices (especially business confidence, possibly consumer confidence) initially, even before Donald Trump takes office in the White House on January 20. Secondly, undoubtedly less immediate, the measures favorable to the economic world will eventually be reflected in the figures after only a few months. Today, the risk of recession has clearly receded, if not vanished. The Trump program is more confidence, which turns into more growth, which ultimately turns into more inflation. Not very Powell-friendly!
The Fed therefore lowered its key rate by 25bp, hinting at a final cut for 2024 of an additional 25bp on December 18. However, Jerome Powell did not “guarantee” the latter, emphasizing that it remained “data dependent”. We were not at all surprised by this decision, expected by almost 100% of market participants. However, we were surprised to see that this rate cut was voted unanimously. Obviously, the media mainly remembered Jerome Powell’s “no” concerning his dismissal and/or his resignation. Once again, we believe that the central bank has confused the desirable with the probable. What was desirable was that, faced with growing uncertainties, the Fed would take a slight pause in its monetary accommodation program. The probability is when 100% of market participants expect something, it must be given to them. Even if, as “Jerome Dr No” reminded us, the Fed does not make policy, there will undoubtedly be, at one time or another, a monetary policy problem. Indeed, 2025 is likely to come down to a possible no-landing combined with a resumption of inflation. That said, where the Fed’s argument is right is that a central bank manages over the medium-long term and avoids “stop and go” when it comes to rate increases and decreases. Trump arrives at the White House at the end of January, the first consequences of his program will be seen much later. The Fed therefore has room for maneuver for the moment that it can manage as it wishes.
Where are nominal and real rates going?
So we’re revising our so-far ultra-dovish forecast for 2025: The Fed will cut rates on December 18, and then just twice over the next year. It risks having to lower them again but probably much later, when long-term rates returning to 5% will have caused sufficient damage and not only on the CMBS market. We are therefore also revising our objectives on long rates. Our attempts to buy back 10-year bonds above 4.5% were made obsolete by the tidal wave of the GOP which controls the Senate and House of Representatives. From now on, we would rather be tempted to add duration if long rates approach 5%. In any case, at 4.5% we won’t move an ear. Too risky!
There could possibly be an alternative to the 10-year Treasury. If the latter actually finds itself in a correction phase and goes, as we wish, from 4.3% to 5%, we should see if this tension on nominal rates finds its equivalent in real rates. Today the 5-year TIPS is trading at 1.8% and is of no particular interest. But imagining that it climbs to 2.3% for example and that, under the Trump II mandate, inflation stabilizes around 2.6%, we would be very close to the famous 5% but with the 5-year indexed on inflation in place of the nominal 10-year bond. This is an alternative to consider. We are not there at all for the moment but if the sell-off which began in September (the day after the jumbo rate cut) continues on nominal long rates, it will undoubtedly provide us with a chance to seize investment opportunities on intermediate real rates. MAGA=MIGA.
