We turn now to the U.S. to inform our readers of an emerging narrative suggesting that the traders who correctly predicted that the Fed would go hyper-hawkish on rates are now sensing the potential for rate cuts – due to the economy rapidly softening. Bond traders are now expecting a rapid cut in rates as early as mid 2023 if the economic hit of past and coming rate hikes is too great. Expectations of U.S. rates going up as high as 4% are now anticipating a 3.3% rate by Q1 2023. Gang hu, a senior banker at Winshore Capital Partners summed up the logic behind these views succinctly: “Markets are saying recession is coming, inflation will slow down, commodities will fall and the Fed will cut rates in 2023, it’s hard to fade it because this story line is consistent. It can be a self-fulling process.” All of this should unfold and reverberate in Canada; potentially affecting very similar outcomes.
Recession fears kicked in quickly for the oil markets, prices are now beginning to plateau as the expectation of slowing demand and a recession builds. With 30 year fixed rate mortgage costs in the U.S. having doubled recently, the impact on real estate and housing starts is already being felt (6% rates for 30 year mortgages haven’t been seen in over a decade). The U.S. economy continues to slow, and much of the loss of confidence is being reinforced by more and more projections of a slowdown in Q2. The Atlanta Fed’s GDPNow tracker now points to a 1% contraction for the second quarter, following a 1.6% slide in GDP in the first three months of the year. By the end of 2023, some traders see rates going down to 2.7% after the first round of rate cuts that could come. Jay Powell and other apparatchiks in the Federal Reserve system have repeatedly said that they will be nimble with their rate actions, but that for now, rates will keep going up until they see clear evidence that inflation is coming down. In other words, flexible hawkishness.
Some see rate cuts coming as early as the end of this year, not in mid 2023. Michael Yoshikami, founder of Destination Wealth Management, said as much to CNBC: “Inflation is runaway right now. The Federal Reserve is going to bring out these multiple very, very strong signals that they’re looking to control inflation, it is going to dip the economy into a slow growth, stagflation or a recessionary environment and then I think the Fed going to start cutting rates again later on this year. If the Federal Reserve moves us closer towards recession and breaks the back of inflation and has to cut a little bit to simulate the economy.” Tembo predicts that the economic and commercial synergies between the U.S. and Canada will see many of the predictions outlined in this article unfold with the actions the BOC could take in the coming months.