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WHEN MARKETS STRUGGLE TO PRICE OUT A FED HIKE

Markets have been pricing out the possibility of deeper rate cuts on both sides of the Atlantic since early 2024, with some market participants flagging the chance that the Federal Reserve might not have finished hiking rates.

Barclays strategists crunched some numbers and found the critical difference in market pricing of the ECB and Fed policy paths is the probability of rates being higher than current levels.

“The constellation of data in the U.S. has implied that the market today assigns a c.30% probability of a >5.5% policy rate by end-2024, the same weight it assigned as of last October when the higher-for-longer narrative was at its strongest,” they say in a research note.

That probability increased if compared with the year-end bond rally which was coupled with the most exuberant expectations of policy easing.

“For Europe, in contrast, the probability of restarting rate hikes year-end is little changed from where it was at the start of the year when the market was at its peak dovishness.”

U.S. Treasury yields hit more than five-month highs after data on Thursday showed that a measure of inflation rose more than expected in the first quarter, even though growth was weaker than thought.

(Stefano Rebaudo)

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