World bond and equity markets are rallying today, hoping the latest signs of weakness in the U.S. economy will push the Fed to pause its aggressive rate hiking campaign. The so-called “Fed pivot” garnered additional support today after the Reserve Bank of Australia (RBA) raised interest rates less than expected.
Monday’s U.S. manufacturing news sparked a rally in bonds and stocks that pushed bond yields lower after the Sep ISM manufacturing index fell -1.9 to a 2-1/4 year low of 50.9, weaker than expectations of 52.0. Stocks and bonds rallied further today after the RBA raised its cash rate target by 25 bp to 2.60%, below expectations of a 50 bp rate hike. That has bolstered speculation the world’s central banks may be nearing the end of their aggressive rate hiking campaigns.
Global X ETFs said the risks are leaning “to a dovish turn toward the end of the year rather than a hawkish surprise from central banks.” Also, Danske Bank A/S said, “central banks may start to realize that raising rates so fast will lead to a severe recession, so they slow down and get volatility down.”
However, ING Bank NV remains skeptical about an imminent Fed pivot, saying despite Monday’s weaker-than-expected ISM manufacturing figures, the U.S. domestic story “remains rather solid” and leaves Fed tightening prospects alive.
Those trying to call for an end to aggressive rate hikes have been wrong before. Hopes that an economic slowdown would start to tame soaring inflation were deflated as inflation pressures persisted. A summer rally in stocks and bonds came to a screeching halt after Fed Chair Powell dampened speculation that the Fed would soon reverse course from its aggressive monetary tightening when he spoke at the Fed’s annual symposium at Jackson Hole in August.
This Friday’s monthly U.S. payroll report will show if the Fed is getting closer to a pivot on its aggressive rate-hiking campaign. ING Bank NV said, “we see Friday’s payrolls report as a potential trigger for a fresh hawkish repricing, and a positive event for the dollar. Also, Union Bancaire Privee Wealth Management said “the U.S. economy isn’t in a position where they need to ease. They are going to try and hold off as long as they can to prevent from rekindling the asset bubble they created a few years ago.”
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