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The Latest From Our Fed-Whispering Guest Author Yimin Xu.
The bond market moved in line with our expectation
In my November 14 note, I flagged at the time that, “the market reaction is just slightly too dovish in their prediction of the terminal rate (4.75%-5%). I believe the Fed will at least in the short-term stick to their “slower but higher” theme. There is a still good chance that the terminal rate could still breach 5% by early 2023, likely via two 50bp hikes in December and February, followed by a single 25bp hike in March.”
We also have been saying for a while that “just like the hiking cycle, when the rate cut cycle begins, it is a one-way train that usually goes much faster and further than most people initially expect.” (This is a quote from a 31 October note in our Growth Investor Pro service).
Since our last update in mid-November, the rates market precisely delivered on our expectations above. The Fed Funds futures bull flattened (short-end yield going up and long-end yield going down), with the 2023 terminal yields standing just over 5%, in the form of two 50bp hikes and one 25bp hike in the next two meetings. The rates market also foresees a cutting cycle starting as soon as next September, first slowly, then rapidly in 2024.
So what next?
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