The market is doubting the Federal Reserve once again.
The median dot for 2023 rose to 4% in the latest edition in June with policymakers pledging to go above neutral. The market followed that thinking for a time but has had a quick rethink on signs of flagging demand and a peak in prices.
The February fed funds futures contract now prices at 2.29% and US 2-year yields are at 2.79% -- both signs that the bond market doesn't think the Fed will even get to 3%, let alone 4%.
The short-term problem for markets is that we're still being hit with data from April, May and June when demand was stronger. But there are signs of falling new orders and the travel chaos and extremely high prices at the moment will be a deterrence on the services-spending side too.
Tomorrow we will get the minutes of the latest Fed meeting and they're sure to show an extremely-hawkish Fed. However things are changing so quickly that we could see the message tempered later this week by Fed officials.
It's a similar story in Europe which is the flashpoint of today's market mayhem and the potential for a global growth slowdown. There's no doubt that Europe if facing an energy shock but the jobs market isn't nearly as tight as the US and core inflation is more-controlled. Today alone, the rates market has taken down the scope for hikes to 120 bps this year from 130 bps.
At the moment though, we're stuck in a market vortex of worries about higher interest rates and lower growth while (aside from bonds) giving little credence to the growing likelihood of tempered inflation and rate hikes. That pivot will come whenever the Fed offers a hint.
