The battle over the Fed’s next move
In a rare "flash order," JPMorgan strategists are recommending the sale of two-year US Treasuries as a tactical maneuver, estimating that the resilience of the American economy will make it difficult for the Federal Reserve to proceed with aggressive interest rate cuts. As strategists led by Jay Barry noted in their report, "the economic foundations remain strong, and it will be difficult for Kevin Warsh to steer the FOMC at will once his appointment is confirmed and he assumes the chairmanship," referring to the Federal Open Market Committee.
A decisive role in the Fed's next steps is expected to be played by the critical announcement regarding US inflation. Any sign of price deceleration could bolster demand for short-term, interest-rate-sensitive government bonds. The median analyst forecast places the annual core Consumer Price Index at 2.5%. Markets are already pricing in a 25-basis-point interest rate cut in July and another one by the end of the year.
Intense volatility
Today, ahead of the data release, Treasury yields were moving toward stabilization, with the two-year bond hovering near 3.47%. The week has been characterized by intense volatility: yields retreated on Thursday amid a sell-off in equities, while on Wednesday they recorded an uptick following robust employment data. Ella Gude, head of fixed income at BNY Investments Newton, told Bloomberg TV that the risk remains high for a new inflationary push, which could drive the 10-year bond yield toward 5% "quite quickly."
The opposing view
There are, however, contrary opinions. Hedge fund manager David Einhorn estimates that a Fed under Kevin Warsh will cut rates "significantly more" than what markets currently predict. The co-founder of Greenlight Capital has taken positions in futures on the Secured Overnight Financing Rate (SOFR), anticipating a rally in the event of more aggressive monetary policy easing. For its part, JPMorgan predicts that core inflation (excluding food and energy) rose by 0.39% in January, compared to a Bloomberg Economics estimate of 0.31%, pointing out that it will be difficult for short-term yields to fall substantially from current levels.
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