The S&P 500 sank as much as 1.8 per cent after the biggest two-day surge since April 2020 drew in traders tanked up on newly dovish monetary bets. While the index clawed back most of the losses to close 0.2 per cent lower, would-be bulls were put on notice as Federal Reserve Bank of San Francisco President Mary Daly disabused notions that a policy pivot is in the offing.
“We’ve been struggling with this idea that markets are pricing a fast pivot from the Fed next year,” said Christian Mueller-Glissmann, head of asset allocation research at Goldman Sachs Group Inc, who correctly warned that real yields would turn positive this year -- bringing with them bear markets. “We see the Fed continue to hike into next year so it might be too early to expect long-dated real yields to peak on sustained basis.
The recent risk appetite runs counter to the hawkish missives lobbed by Fed officials on a seemingly daily basis, talking up their steely resolve to crush elevated price pressures. The central bank’s own dot plot forecast suggests the hiking cycle will see rates moving to 4.6 per cent in 2023, compared with the current benchmark rate at around 3.25 per cent.
Yet those expectations are too benign, says Goldman’s Mueller-Glissmann. And it wouldn’t be the first time hopes for peak inflation have been disappointed. The U.S. consumer price index climbed by a more than forecast 8.3 per cent in August from a year earlier, wrong-footing many in the market. The Fed’s preferred inflation metric, core PCE data, also exceeded predictions last week.
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