Q2 Rate Cut Forecasts
The second quarter Q2 rate cut forecasts for the Fed in 2024 are varied to say the least.
Exhibit one shows Q2 rate cut forecasts in 2024. A total of 21 major financial institutions made their forecast in June 2024.
Most institutions, eight to be precise or 38%, are forecasting the Fed will make one 25-basis points rate cut in Q2.
Seven institutions think the Fed will make a 50 basis point cut before 2024 ends.
Three institutions do not think the Fed will make zero rate cuts in 2024.
Approximately 86% of major financial institutions believe the Fed will make 50 basis points cuts or less in their Q2 rate cut forecasts
So, the market consensus of a 50 basis point cut in 2024, which is half a percentage, could be over-hawkish.
Only three institutions, 14%, have a second-quarter Q2 rate cut forecast of 75-100 basis points.
With inflation cooling, the Fed is leaning towards the jobs report when deciding on these anticipated rate cuts.
The hawkish market consensus on Q2 rate cut forecasts centres on the job report, which is much weaker when scratching the surface.
Here is my case for why the Q2 rate cut forecast consensus of 50 basis points or less could be wrong.
The market expectations for the jobs report have been lower since April.
The April job report was revised down by 57,000 jobs, and May was revised down by 54,000 jobs, which is not insignificant numbers.
Put simply, the bar has been lowered for political gain for the pending elections. Worker participation rates are near fifty-year lows.
The job report is not strong, and it is weak.
In May, there were no additional jobs in the manufacturing sector, and 8,000 jobs were lost in June.
Anomaly Q2 rate cut forecasts could provide investor trading opportunities
If the recession is far worse than the consensus, the future jobs report could continue trending downwards, which would justify the Fed making more dovish rate cuts than the market anticipates.
Think about it. Last year, 2023, was the worst time for treasury bond investors in the history of the treasury bond market.
So, if the Fed wants to make treasury bonds (US Paper) Great again, they would angle monetary policy towards creating conditions for a worse recession than anticipated and more Fed rate cuts than the market is forecasting.
Getting the market wrong-footed on their Q2 rate cut forecasts would be a Machiavellian way to trigger a Q2 bond rally in 2024.
But if this plays out, there could be a rotation of capital flows from stocks into bonds.
Big investors have cash mountains on the sidelines.
In January 2024, a record six trillion US dollars was sitting on the sidelines, it was widely reported.
When cash is out of the market, asset prices are depressed, and when they get back in, prices rally.
Frankly, with so much cash already sidelined when the Fed eventually cuts, capital will flow into all assets and the rally everything could lie ahead.
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