Fynsa
The market has shown greater optimism in recent months. The United States presented good economic results, inflation seemed to be under control and the labor market finally moderated its behavior, which month after month exceeded the expectations of financial operators, generating negative consequences for the market.
This optimism was reflected in expectations of a rate cut by the Federal Reserve (Fed), with a 65.8% probability that it would be 50 basis points (bps). Although the balance was not completely tilted to one side, the FED decided to "surprise", applying a 50 bps cut and placing the rate in a range of 5.00% - 5.25%.
From that moment on, the perception of risk in the market gradually increased. The Treasury reached 3.84% (+18 bps) on October 3, 2024, just one day before the "US Nonfarm Payrolls".
The employment report showed that the labor market continues to demonstrate its strength: both the September data and the July revision exceeded expectations. The Treasury rate 10-year Treasury rate rose 12.5 bps in a single day, and since then, the market has been tightening, rising about 10 bps during the week. All told, the prime rate has risen approximately 42.5 bps since the Fed's September meeting.
After these fluctuations, no one expects the Fed to be so bold as to cut the rate by 50 bps again. Any move outside of what the market estimates will increase the current risk sentiment. For the same reason, a 25 bps reduction is expected for the next meeting, with a probability of 80.2%.
The U.S. economic outlook, together with the international one, influenced by the intensification of the war, are factors that -in my opinion- will lead the Federal Reserve to partially slow down rate cuts. However, it remains to analyze the September inflation data, which was published this October 10. It is expected at 0.1% m/m and 0.2% in core. A higher-than-expected figure would drive a base rate hike and could provide an incentive to keep the rate at the current level.
The volatility of today's scenario makes it difficult to define strategies and the "soft landing".soft landing"that had been projected could crumble with the upcoming data. Strategies that bet on economic normalization could be affected.
To take duration in this context seems risky, which is ironic, considering that in my previous column (It is not too late to take duration | Fynsa) I suggested that there was room to exit short-end positions. short-end and venture into the belly and belly and long of the curve, which today have been more affected by the base run. In any case, I remain faithful to the strategy I suggested; more than bad, we are still data-dependent, which gives little insight as to what will happen.
Economic uncertainty continues to weigh on investors' decisions and any misalignment in market projections could generate an adverse reaction. The Fed faces the challenge of maintaining the balance between growth and inflation.
Upcoming data, especially inflation, will be key in defining the direction of rates and the market in general.
