The US Treasuries curve bear steepened in response to the start of the Fed easing cycle. To be sure, last night marks a big pivot from Fed Chair Powell who kicked things off with an aggressive 50bps cut. However, we note that the forward path may not be as clear. Notably, there was one dissent in the concluded meeting. Moreover, there is also considerable dispersion in the dotplot for 2024 (narrow majority sees an additional 50bps of cuts) even as there are only two meetings left. Further out, the dotplot median has 100bps of cuts pencilled in for 2025 and an additional 50bps for 2026, taking the FFR to the Fed’s estimated long-run value of 2.90%. The sharp dovish shift mirrors more downbeat unemployment rate and inflation forecasts in the SEP. The upshot is that as “job gains have slowed” and the Fed has “gained greater confidence” on inflation. Against this backdrop, a return to neutral would be appropriate.
From a market’s perspective, much of this has already been priced. Realistically, if easing is required, the bulk (if not all) of the rate cuts should be completed within a year. We also note considerable uncertainty on where the neutral point is and the Fed did nudge the long-run FFR estimate to 2.90%, from 2.80% previously. A lot would also depend on incoming data. While there are some signs of weakness in the US economy, a pre-emptive Fed that is more worried about safeguarding economic growth should lead to diminished recession risks down the line. Moreover, the first 150bps of cuts (which would take the FFR upperbound to 4%) would be relatively easy to deliver. However, the debate would likely intensify thereafter, especially if the economy continues to hold up. Accordingly, even as the front of the curve is set to grind lower as the Fed cuts, the back of the curve may drift higher (reflecting greater optimism and perhaps the resumption of hikes), further steepening in the curve in the process.
Our USD, SGD and HKD interest rates forecasts have been adjusted accordingly.
Topic
Explore more
E & S Macro StrategyGENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates)
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
[#for Distribution in Singapore] This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply. The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.