Related Insights
Across the G10 space, the market is expecting the Fed to be the most dovish, factoring in some 125bps of cuts over the coming 18 months. We also note that Fed pricing is more dovish relative to the other central banks by a considerable margin (around 50bps more than Norges Bank, which has the next most easing priced). Most of this dovishness can be explained by a Fed that is perceived to be late in cutting amidst tariff-related inflation uncertainties. Moreover, signs of labour market weakness (especially the downwardly revised NFP figures) have raised the possibility that the Fed may have to play catch up. In any case, speculation of a more dovish Fed mix is likely to intensify. President Trump is set to name a replacement for outgoing governor Kugler and this person may well play the role of a shadow Fed Chair. A more dovish Fed tilt looks unavoidable. That said, the persistent rise in equity indices against a backdrop of lower yields bears watching. There are several ways to interpret this. First, there could be complacency in stocks and lower yields reflect a more pessimistic economic reality buffeted by tariff uncertainties. Second, stocks may be right and the US economy may be doing fine. In which case, overly loose financial conditions, stoked in part by Fed easing bets, could drive longer-term yields higher. The jury is still out.
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