THINK Ahead: What markets are getting wrong on rate hikes
ING argues that the disconnect between surging US equities and elevated rate expectations suggests markets are mispricing the pace of central bank rate cuts. The desk contends that investors are overly optimistic about a soft landing, underestimating the persistence of inflation and the likelihood of further tightening or delayed loosening.
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.
How firms align with this view
Aligned with the desk view
Contrary positioning
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.
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.
Risks to this view
The main risk is that inflation cools faster than ING expects, allowing the Fed to cut rates without sparking a rally in risky assets. Additionally, a recession could force aggressive easing, which would validate market pricing but undermine ING's thesis. Geopolitical shocks could also alter the inflation picture.
Sources & References
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