Federal Reserve’s rate-cutting path will be “gradual and shallow,” Jefferies strategists noted, as they believe the macroeconomic environment will remain resilient while inflation stays persistent.
Over the past two weeks, analysts have argued that fears of a hard landing are unwarranted. While they anticipate some slowdown in employment data in the coming months, they believe this will align with a soft landing scenario. The rationale for an inter-meeting cut or a 50bp cut in September has been dismissed.
Jefferies highlights that market expectations for a September rate cut have decreased from a peak of over 60bp to 32bp, while 2024 cut expectations have dropped from nearly 120bp to 92bp.
It points out that "the September cut pricing is now close to fair," although there is some potential for further adjustment in December cut pricing.
Analysts remain in the 25bp camp for September and 50bp for year-end but acknowledge the possibility of a risk premium if unforeseen issues arise, which could require the Fed to take additional action. Moreover, they maintain their position on December Fed Funds with a target of 75bp priced in for the year.
In terms of equities, analysts have referenced valuations from the end of July.
The S&P 500 is slightly above its end-July levels, and the NASDAQ is nearly there, while the Eurostoxx is about 1% below its end-July levels.
In credit, EUR IG Main is only 1bp wider than at the end of July.
Overall, Jefferies’s stance on risky assets remains positive, mainly due to a robust economy and expectations that both the Fed and the European Central Bank (ECB) will cut rates at the September meeting.
"We are in the camp of a gradual and a shallow rate-cutting cycle as we believe that the macro picture will remain resilient and inflation sticky,” analysts wrote. ”Market path is unlikely to be a straight line."