What’s different now is that swaps traders expect the Federal Reserve’s next move will not be an extended pause, but instead a rate cut, perhaps as soon as July. Such a U-turn to easy policy suggests a recession that will force the central bank’s hand. Add beaten-down US regional bank stocks and tepid profit forecasts from Corporate America into the mix, and the outlook is grim.
Markets may have just survived the last of the most aggressive rate hikes in four decades. Few on Wall Street are celebrating.
If Wednesday’s quarter-point hike marked the peak of the cycle in the US, as market-implied odds suggest, the prospects for risk assets look glum. That’s in sharp contrast to the prior seven tightening cycles, where the final hike has almost always driven rallies in stocks and riskier credit. The one exception came at the end of the dot-com era in 2000 when recession pressures were beginning to build in the economy.
