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The market may be offsides on the Fed trade.
That’s the indication from the April/May CNBC Fed Survey where 63% of survey respondents forecast a 2020 rate hike and some survey respondents believe a rate hike could and should happen this year.
“The Fed has clearly pivoted from being autopilot hawkish to ‘The Year of Living Patiently,'” wrote Art Hogan, chief market strategist at National Securities, in response to the survey. “I think one of the biggest surprises for 2019 may well be stabilizing economic growth globally and a fourth-quarter rate hike by the U.S. Federal Reserve.”
By contrast, the fed funds futures markets trades with a nearly 80% chance of a rate cut in 2020.
The main difference between markets and the survey respondents appears to be in their economic outlooks. Respondents see growth slowing to 2.35% this year, from around 3% in 2018, but that’s still above trend. And respondents put the probability of a recession in the next 12 months at 21%, down 5 points from a recent high hit in February.
“The markets are irrationally pessimistic about the future. There is no recession coming,” wrote Chris Rupkey, chief financial economist at MUFG. “Cutting rates for low inflation at this time is ill-advised. … The Fed should restart its gradual pace of rate hikes later on this year.”
With stocks hitting all-time highs, they may already have shed their recession fears, but low bond yields suggest concerns still weigh on fixed income markets. Respondents see the 10-year yield rising to 2.75% by year-end from the current level of around 2.5%. And that’s down considerably from the November survey when forecasters envisioned a 3.5% 10-year note.
“The most likely course is no policy action, neither a cut nor an increase. Therefore, bond yields are likely near the low end of their trading range for the year,” said John Donaldson, director of fixed income, Haverford Trust Co.
Some thinks bonds are right
To be sure, some believe the bond market may have it right. A third of the 45 respondents, who include fund managers, economists and strategists, forecast a 2020 rate cut.
“The interest rate markets are now pricing a near 40% chance of recession by 2020, which is in stark contrast to the near-record level of U.S. equities. Bonds tend to be early on recession calls and stocks late,” wrote Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.
Survey respondents see the S&P 500 nearing 3,000 this year, up about 1.3% from the current level, and hitting 3,028 next year.
Key to the economic outlook is that 77% of respondents believe that the U.S. and China will strike a trade deal this year and few believe another government shutdown is likely.
The tax cuts are seen boosting potential GDP by nearly 0.4% to 2.35%, while tariffs reduce this year’s growth by about half that amount. The global slowdown could shave a quarter point off of U.S. growth.
Those crosscurrents have 56% of respondents believing the Fed remaining on hold this year and the average funds rate remaining around 2.4%.
