Market interest rate pricing issue? Investors should be "independent of" the Federal Reserve!
The market's expectations for a year-end rate cut by the Federal Reserve are too high, according to Mohamed El-Erian, who believes the market has overreacted. US Treasury yields have slightly declined, with traders increasing bets in the futures market, predicting a rate cut of up to 1 percentage point. El-Erian suggests that the Fed should actually cut rates by 75 basis points before the year-end. Francisco Vidal of F/m Investments stated that as interest rates fall, US stocks will become more attractive, supporting investments in stable companies such as Amazon and Home Depot
According to Mohamed El-Erian, traders' expectations for an aggressive series of rate cuts by the Federal Reserve before the end of the year are too high.
On Thursday, the Master of Queens' College, Cambridge University, said in an interview: "In my view, the market pricing in so many rate cuts is problematic, the market has overreacted."
After the release of the Fed meeting minutes and revisions to U.S. employment data, U.S. Treasuries slipped slightly on Thursday. The Bloomberg U.S. Treasury Index has risen by about 1.8% so far in August.
In recent days, traders have increased their bets in the derivatives market, believing that Fed policymakers will ease policy by as much as 1 percentage point before the end of the year, starting in September, possibly cutting rates by 25 basis points or even 50 basis points. The Fed's July meeting minutes indicated that several officials saw reasons for a rate cut next month, and the latest employment data showed that job growth was not as strong as previously reported, further confirming that a rate cut is almost certain.
According to El-Erian, the more realistic approach for the Fed would be to cut rates by 75 basis points before the end of the year.
He said: "There is a view that, in order to achieve a soft landing, the Fed needs to take a tough policy response, which must be somehow reconciled. The market will eventually have to adjust."
As the Fed's annual symposium convenes in Jackson Hole, Wyoming, traders will be looking for clues about the extent of the Fed's policy easing. Fed Chair Powell will discuss the economic outlook on Friday.
Major U.S. stock indices may face some intraday pressure. Francisco Bido, Director of Quantitative Research and Portfolio Manager at F/m Investments, discusses his views on the market in this context.
Bido points out that as interest rates start to decline, U.S. stocks will "look more attractive", and he adds that consumers, the retail industry, and the overall economy will benefit from this. He recommends investing in "fundamentally sound" companies in this environment, such as Amazon (AMZN) and Home Depot (HD), calling them "solid long-term investments."
Bido states that if Powell reiterates that "the labor market is softening and acknowledges that the Fed is data-driven," this could have an impact on the market. However, he emphasizes that regardless of the Fed's actions, investors should "position themselves independently of what the Fed may or may not do" and focus on returns and data.