Central banks have delivered 32 interest-rate cuts globally this year as a worsening U.S.-China trade war drags down global economic growth. Swap markets suggest we’re not even at the halfway mark for cuts yet.
Traders are expecting much more. Over the next 12 months, interest-rate swap markets have priced in around 58 more rate cuts, assuming central banks maintain their current trajectories in easing. Those cuts could total another 16% in global reductions.
And when it comes to the US, the Equity and Bond markets have already priced in further rate cuts. The Fed’s target rate range is between 2% and 2.25% after a cut of 25 basis points in July. If Fed Powell doesn’t continue to cut rates, many on Wall Street (and Trump) are saying the Feds will cause the next recession. A big part of this thesis is when the Feds raised rates four times in 2018 with the last one causing that massive sell-off in December (Merry Christmas).
The US Feds are in a tough spot because the US economy is actually still growing…just at a slower pace. The economy expanded by 2% in the second quarter and consumer confidence is still near all-time highs. Based on the historical correlation between the stock market and consumer confidence once the index hits 100, consumer confidence may be about to dip, which could hit the retail space hard and evidently the stock market.
But what’s going on around the world can’t be ignored, the global economy is slowing down. And probably more important, the invert yield curve can’t be ignored either because it’s only predicted the last 5 or 6 recessions.
And so, from a fundamental standpoint, based on the continued rate cuts around the world, I expect the 10 yr bond to continue to move higher over time. However, from a technical standpoint, price is currently in a monthly supply zone. The chart suggests price will pull back, before moving higher.
On the daily chart, price should at least stall at these levels, if not react and move higher.
This post is my personal opinion. I’m not a financial advisor, this isn't financial advise. Do your own research before making investment decisions.