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The Cure Before the Disease: Fed Pivot and Alternative Scenarios
Aurelie Barthere
Key Takeaways
8 min read
  • Markets’ jitteriness has triggered reactive statements from Secretary Yellen and led to intermediated banking acquisitions, and offers of liquidity backstops for banks.
  • But central bankers are more sanguine than governments and remain primarily focused on taming inflation.
  • This combination would lead to our main scenario of Fed rates stable for a few more months (vs markets’ expectations of rate cuts as early as June this year), putting more stress on risk assets and culminating into a hard landing.
  • We think that crypto and tech stocks are anticipating the cure (central bank easing policy) before the disease (hard landing), the latter having been historically negative for Tech equities’ returns since the 1980s.

Of investors’ fear and recessionary trades

Markets have remained jittery all last week, with the main theme remaining banks’ distress, and a new epicenter emerging in the Eurozone with Deutsche Bank. First Republic Bank’s stock fell -43% and Deutsche Bank’s dropped by -8%. Oil and energy markets underperformed (implying expectations of less demand and less inflation).

But as market participants were anticipating the disease (slower growth), they were also pricing the cure (central banks easing monetary policy): the US Treasury 1-year yield shaved -30bps, vs -10bps for the US 10-year yield, inferring further rate cuts from June 2023 on, in contradiction with the Fed’s projection at last week’s FOMC meeting. The FOMC committee...