Markets are pricing in bigger rate cuts, are they right?

Home
Dashboard
Markets are pricing in bigger rate cuts, are they right?

Key Takeaways

Markets are now pricing in more cuts over the next year or so in the US, UK and eurozone.
Despite the commonality of the moves, the three economies are moving quite differently.
The US economy is gently slowing, inflation seems to have resumed its downward trend and following recent weak labour market data, investors are on recession alert.
By contrast, the UK economy is picking up and consensus expectations are for 2% year-on-year growth by year end.
Eurozone growth is anaemic and headline inflation has fallen fast. But core inflation has been stuck at around 3% for the last three months.
So, the outlook for rate cuts looks reasonably good in the US, is OK near term for the UK (but not in 2025) and is slightly worrying for the eurozone.
All of this is data dependent of course with the next US employment report especially important.

Transcript

Looking through the gyrations of earlier this month, markets are now pricing in more cuts over the next year or so in the US, UK, eurozone (and elsewhere) than they were in the summer. Despite the commonality of the moves, these three economies are moving quite differently. We take a look at the outlook and draw conclusions about whether market pricing is correct.

Let’s start with the US. The economy here is gently slowing, inflation seems to have resumed its downward trend and following the weak labour market report earlier this month, everyone is on recession alert. We explained in our podcast two weeks ago that the chances of a recession in the near term were low – despite the strong signal in the data – and the market has now come round to that view too. Nonetheless, the mood music has changed.

There is another employment report before the FOMC meet on 18^th September and that will determine whether they cut by 25 or 50 bps. Markets expect the Fed funds rate to fall to 3.2% next year, a reasonable assumption but one with significant downside if the economy were to slow a little faster. The November election will be influential, with rates generally expected to be higher under Trump than Harris.

The UK economy by contrast is picking up and consensus expectations are for 2% year-on-year growth by year end. That’s the fastest in the G10 (which actually has 11 members!). Now 2% is hardly booming but it does reduce the pressure on the Bank of England (BoE) to cut interest rates. Last week’s inflation numbers did come in lower than expected, including on the measure favoured by the BoE which focusses on services. But that was due to holiday prices being measured before the school holidays began so we should see a bounce back in next month’s figures.

Headline inflation is headed higher due to increases in household energy bills. On the good news side, wage inflation should see a significant fall on the closely watched three month-on-three month basis, as we move away from April’s 10% hike in the minimum wage. We discussed in last week’s podcast that government generosity on public sector pay risked boosting the ‘going rate’. I confess that I got it wrong on next year’s minimum wage though: I read ministerial comments to suggest that it would go up by 6% or more but the remit has published and the best guess is for a 4% rise. That’s good news for inflation.

The markets are pricing in 50 bps of cuts by year end with another 100bps in 2025. 5-year swap rates are now below 4% and mortgage rates for the best credits have followed suit. My guess is that we’ll get the 50 bps by year end but that the markets are too optimistic for 2025.

In the eurozone, markets expect over 50 bps by year end with another 80 bps in 2025. Eurozone growth is anaemic and inflation has fallen fast. But core inflation has been stuck at around 3% for the last three months and the European Central Bank (ECB) has been raising its inflation forecast. Much will depend on wage data released on Thursday. We only get these numbers once a quarter, the last ones were surprisingly high and the ECB went out of its way to downplay them. We need to see a big improvement this week. On balance, I’d be marginally negative on eurozone rates.

So, to sum up, the outlook for rate cuts looks reasonably good in the US, is OK near term for the UK but not in 2025 and is slightly worrying for the eurozone. All of this is data dependent of course with the next US employment report especially important.

As for risk assets, continued economic growth with falling rates looks like a favourable background to me.

unstructured

Steven Bell

Chief Economist, EMEA

Steven Bell is a Managing Director, responsible for providing macro strategy input to a broader range of multi asset investment portfolios. He joined Columbia Threadneedle through the acquisition of BMO GAM (EMEA) in 2021, having previously been with BMO since 2013. He joined the group having run the GLC’s Global Macro programme for the previous seven years. Before that he was Global Chief Economist and Investment Head of the UK multi asset business at Deutsche Asset Management during his tenure 1984 – 2005. Steven began his career as an Economic Adviser at the UK Treasury and has degrees in economics from the London School of Economics and Stanford University, California.

PDF

Key topics

Multi-Asset

Subscribe where you listen to podcasts

Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

Legal and regulatory disclosures

For professional clients and/or qualified investors only

Nothing on this website is, or is intended to be, an offer, advice, or an invitation to buy or sell any investments, in any jurisdiction where, or to anyone whom it would be unlawful to do so. Please read our full terms and conditions before proceeding further with any investment product referred to on this website. This website may not be suitable for everyone, and if you are at all unsure whether an investment product referenced on this website will meet your individual needs, please seek professional advice before proceeding further with such product. I have read and accept the terms and conditions and cookie policy of this site.

Decline

Markets are pricing in bigger rate cuts, are they right?

Key Takeaways

Important information

Related articles

Will the £22bn black hole suck the UK back into recession?

Interest rates are coming down – but how fast?

What are central banks telling us about interest rates?

...

Legal and regulatory disclosures

For professional clients and/or qualified investors only