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Despite the cross-asset rally in recent weeks, market-implied recession probability models reveal a growing divergence between front-end rates and other assets. While the market's pricing of recession risk has trended lower, the approximately 125 basis points of cuts priced in by the market over the next 12 months suggest a higher perceived probability of recession. This divergence is notable, and the extreme easing currently priced into front-end rates appears at odds with diminishing recession expectations.

With the monetary policy factor rather than a slowing growth factor driving the bulk of the recent rates rally, traders could be in for a bit of a rude awakening on stronger data or a coordinated hawkish Fed pushback on the extent of rate cuts priced into the curve. 

The coming weeks will bring clarity on the macro and policy path. Key events include US unemployment and NFPs, US CPI, the BOE meeting, and the FOMC meeting, where the committee will revise the Summary of Economic Projections, including the Fed Fund rate dot plot for 2024 to 2026. Options markets are pricing in volatility to peak over the next two weeks, with expectations for a partial reset afterward. 

 

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SPI Asset Management provides forex, commodities, and global indices analysis, in a timely and accurate fashion on major economic trends, technical analysis, and worldwide events that impact different asset classes and investors.

Our publications are for general information purposes only. It is not investment advice or a solicitation to buy or sell securities.

Opinions are the authors — not necessarily SPI Asset Management its officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.

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