THINK Ahead: What markets are getting wrong on rate hikes
At a Glance
The desk posits that current market dynamics reflect a disconnect between soaring US stock prices and persistent interest rate expectations, suggesting that investors may be mispricing the implications of central bank policy. Per the full note , while equity markets are reaching new highs, oil prices and interest rate forecasts remain elevated, indicating potential overconfidence in economic recovery. This divergence highlights the necessity for traders to reassess their positioning ahead of upcoming market developments.
Key Takeaways
- 01Markets are pricing in aggressive Fed rate cuts, but ING warns this is inconsistent with buoyant equities and elevated oil prices.
- 02The disconnect between risk appetite and rate expectations is unsustainable, setting up for a correction in either equities or rate cut pricing.
- 03Most competing banks (Barclays, JPMorgan) expect a soft landing and faster easing, creating a contrarian opportunity if ING is right.
Full Analysis
What the desk is arguing
ING's James Smith contends that the current market rally in US stocks alongside still-elevated interest rate expectations is unsustainable. He believes one of these forces must ultimately give way, implying that either equities will correct or rate cut expectations will rise.
Smith points to the resilience of oil prices and sticky core inflation as evidence that central banks, particularly the Fed, will not ease as quickly as markets anticipate. The desk implicitly rejects the soft-landing narrative that has fueled risk appetite, arguing that policy settings will need to remain restrictive longer.
Where it sits in our coverage
Our internal consensus leans dovish on the Fed, with a target for EUR/USD at 1.075 by end-2025, reflecting expectations of eventual dollar weakness. However, ING's cautionary note aligns more with our risk scenario that rate cuts could be delayed, which would keep the dollar bid in the near term.
Specific firms in our coverage present mixed views. - Barclays has a Dec-26 target of 1.08 for EUR/USD, broadly in line with our consensus. - JPMorgan targets 1.10 for EUR/USD by Dec-26, more bullish on the euro. - Goldman Sachs is at 1.05, reflecting a stronger dollar view.
How other firms see it
ING is relatively isolated in its hawkish caution, while most other banks maintain a more dovish outlook. Aligned firms are few. - Goldman Sachs aligns with ING in expecting the Fed to hold rates higher for longer, but Goldman focuses more on a strong dollar outcome. Contrary firms dominate: - JPMorgan remains bullish on risk assets and expects rapid Fed rate cuts, which it sees as euro-positive. - Barclays also expects a soft landing, though with a more moderate EUR/USD path.
Overall, the consensus leans against ING's thesis, but the market's pricing of rate cuts may be overdone if ING is correct.
Market Implications
If ING's view prevails, expect a repricing higher of short-term rates, which would boost the USD and weigh on risk assets. Conversely, if the market is correct, further equity gains and a weaker dollar are likely. For FX, a delayed easing cycle supports dollar strength, while a rapid easing cycle supports EUR/USD upside.
From the original
US stock markets are surging to new highs. Oil prices are certainly not back to their lows – and neither are interest rate expectations. One of those things surely can't be right, can it? This week, James Smith looks at what investors could be getting wrong about central bank pol
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4 itemsTHINK Ahead: How markets are right – and wrong – about rate hikes
The desk posits that while financial markets are pricing in multiple rate hikes from major central banks, current inflation data suggests that these hikes may ultimately be unwarranted. Per the full note [source], even with rising energy prices, essential indicators like service-sector pricing and wage growth remain stable or even subdued, indicating a divergence between market expectations and economic fundamentals. Our interpretation suggests that unless there is a marked shift in inflation data, particularly related to energy costs, market overpricing of rate hikes could lead to volatility. As of now, consensus positioning shows the market leaning toward heightened rate expectations, but the slowdown in inflationary pressures could challenge these views moving forward.
THINK Ahead: What markets are getting wrong on rate hikes
Lead — The desk posits that financial markets may be underestimating the likely persistence of rate hikes from central banks, particularly in the face of ongoing inflation pressures. Per the full note from ING Economics, the analysis suggests that the market is pricing in a quicker pivot to easing than may be warranted by economic fundamentals. Given the slow pace of inflation reduction and recent central bank communications, this perspective suggests a potential misalignment with actual policy trajectories. Traders should remain vigilant as this mispricing could lead to significant volatility in FX markets.