ICYMI: Goldman pushes next Fed hike to December, sees strong chance no more hikes are needed
The desk is interpreting Goldman's recent adjustment to its Fed rate hike expectations, pushing the next anticipated increase to December, indicating a potential peak in the current tightening cycle. Per the full note , this pivot correlates with a notable drop in 2-year Treasury yields, which fell by the largest margin in over a year, impacting dollar demand. The bank’s adjustments reflect a changing landscape as recent inflation data—specifically, an August PCE rise of 3.4% year-on-year, below expectations—emerges alongside dovish comments from Fed President John Williams. Amidst these shifts, traders should remain vigilant for the upcoming payroll report that could alter rate hike probabilities significantly, given the current market positioning around October rate hike expectations.
What the desk is arguing
The desk maintains that Goldman's forecast to delay the next Fed hike emphasizes a more cautious approach from the Federal Reserve, influenced by recent softer inflation readings. This reflects a prudent reconsideration of previous tightening paths, suggesting that additional hikes may not be necessary as signs of economic moderation emerge.
Goldman's exaggeration of a potential peak in the Fed's cycle is particularly relevant, as the CME FedWatch tool now shows odds for an October hike dropping below 40%, down from approximately 70% a week earlier. Such sentiment supports a prevailing view that the Fed may be approaching the end of its tightening trajectory.
Where it sits in our coverage
Our consensus target for the USD stands at 1.075, within a range of 1.04 to 1.12. The targets from major firms indicate a divided outlook: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's position, suggesting potential US dollar softness, lies at the midpoint of this spread. This dynamic reflects a broader hesitance consistent with market sentiment shifting away from aggressive rate hikes.
How other firms see it
Many firms align with the softer outlook indicated by Goldman, particularly regarding potential Fed policy shifts. Notably, jpmorgan supports a bullish USD stance while bofa expresses caution, expecting less depreciation.
Watch for the relationship between USD/EUR as inflation data continues to influence ECB policy dynamics. Further, shifts in Treasury yields will be pivotal in assessing the overall FX landscape, particularly around key central bank communications.
What the calendar says
With no high-impact U.S. events scheduled in the next 30 days, the immediate focus will be on the upcoming payrolls report, expected to be a key market mover for USD positioning as traders reassess the implications of the employment landscape on Fed policy tightening.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Goldman's shift to a December hike forecast suggests an easing of future rate-tightening expectations.
- 022-year Treasury yields have experienced their largest drop in over a year, likely reflecting investor sentiment regarding rate hikes.
- 03The market is closely watching inflation data and payrolls for signals on future Fed actions.
- 04Oil prices remain a critical risk factor, potentially jeopardizing the softer inflation outlook.
Market implications
Monitor the 2-year Treasury yield as a bellwether for market sentiment towards the Fed, particularly given its significant recent drop. Additionally, the upcoming payroll report could greatly influence rate hike probabilities and USD positioning, creating volatility ahead of expected Fed communications.
Risks to this view
Potential catalysts that could reverse the current outlook include a sharp increase in oil prices, which might reignite inflationary pressures, reversing the current dovish shift. Additionally, stronger-than-expected payroll data could revive October hike expectations, altering the course for USD positioning.
Goldman's shift reinforces the rally at the short end of the Treasury curve, where 2-year yields posted their biggest one-day fall in more than a year on Thursday, and takes some support away from the US dollar. Oil is the main risk to the call: with Brent back above $100 on China's fuel export halt and US troop deployments, a renewed energy-driven inflation pickup could quickly revive October hike pricing. Long-end yields remain near 2002 highs, so a softer Fed path may do more to steepen the curve than to ease broader financial conditions.
Friday's payrolls report is the immediate catalyst, with a strong print likely to push hike odds back up regardless of Goldman's view. --- One soft inflation print was enough for Goldman to push its next Fed hike to December and openly wonder whether the Fed's tightening cycle has already peaked. Summary: Goldman Sachs moved its forecast for the next 25 basis point Fed hike to December from October The bank said there is a strong chance the FOMC concludes further hikes are unnecessary August PCE inflation rose 3.4% y/y versus 3.7% expected; core PCE ran at about 3% Goldman also cited dovish remarks from New York Fed President John Williams Goldman forecasts Q4 core PCE at 3.0%, below the FOMC median of 3.4% CME FedWatch odds of an October hike fell below 40%, from about 70% a week earlier Goldman Sachs has pushed back its forecast for the Federal Reserve's next interest rate increase to December from October, and said there is a strong chance policymakers will ultimately decide that no further hikes are needed. The bank had previously expected a quarter-point rise at the October meeting, which would have followed the Fed's September increase, its first since 2023.
It changed the call after US inflation data for August came in softer than expected and after New York Fed President John Williams made remarks it viewed as dovish. The personal consumption expenditures price index, the Fed's preferred inflation gauge, rose 3.4% from a year earlier in August, below forecasts of 3.7%. Core PCE, which excludes food and energy, rose about 0.25% on the month, also below expectations, for an annual rate of around 3%.
Goldman forecasts core PCE inflation of 3.0% on a fourth-quarter basis, below the 3.4% median projection of FOMC participants. The bank also noted upward revisions to growth, with second-quarter GDP revised to 2.2% annualised and first-quarter growth to 2.5%, while trimming its third-quarter tracking estimate slightly to 3.3%. It raised concerns about Fed Chair Kevin Warsh's communication approach, which favours giving markets less information about how the central bank is likely to react to incoming data.
Market pricing moved in the same direction. CME FedWatch data showed the probability of an October hike dropping below 40% after the inflation report, from around 50% beforehand and about 70% a week earlier. Fed officials remain divided on how far tightening needs to go.
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