The Federal Reserve and the U.S. Treasury have their work cut out for them. I would expect the markets to likely rally if the Fed hikes and fall heavily if it doesn’t. Simply the markets will call a bluff - they would rather see a Fed that is not politically motivated or subdued.
The Bank of America monthly survey of fund managers revealed a disquieting unease about the administration’s ability to control high interest rates. The survey conducted among 170 fund managers controlling about $500Bn is well respected as an indicator of market sentiment, movements and outlook.
The first key finding: About a fourth of those surveyed felt that monetary policy was too stimulative, essentially suggesting that the Fed was behind the curve. Here’s the graphic, see how steep that gradient is, suggesting that fund managers want a rate hike even if it’s inimical to stocks.
With sky high 90% expectations for a rate hike, my big worry is that the Fed not hiking creates a loss of confidence in its inflation fighting credentials and its independence.
I would expect the markets to likely rally if the Fed hikes and fall heavily if it doesn’t. Simply the markets will call a bluff - they would rather see a Fed that is not politically motivated or subdued.
The second key finding: 46% of fund managers see no help from Treasury’s bond buyback program. 29% feel that it would make it worse - a rise in yields! The treasury’s attempt at tamping interest rates have boomeranged. In the last two weeks, the 10-year has jumped from 4.76% to 5.01% and the 30-year has also increased from 5.16% to 5.37%
The third key finding: 33% of respondents felt that a “disorderly” rise in bond yields was the biggest tail risk, higher than the 28% citing AI! The third highest tail risk at 24% was a second bout of inflation. Clearly the treasury and the Fed have their work cut out for them. No surprise that few people are buying bonds even with the 10 year above 5% and the 30-year at 5.37%. A net 48% are underweight bonds.
