We believe that the current market pricing of Fed rate cuts is too aggressive by the end H1CY25 part of the curve. We believe that the current unemployment rate is low by past recessionary standards & has increased recently due to more labour supply due to immigration than actual layoffs. The rates markets are so focussed on weak employment narrative that they have forgotten that AHEs (Average Hourly Earnings) came at much stronger 0.4% MoM in Aug NFP translating to 3.8% YoY wage growth which does not get core PCE to 2% handle even by mid CY25. Recent credit & debit data remain strong, bankruptcy filings are trending lower, S&P 500 earning surprises are +ve for 60% of it’s members & revenue surprises are +ve for 80% of it’s members. US retail sales in the last week has been strong & initial jobless claims 4 week moving average is 230k. The Bloomberg financial conditions index (chart below) is at it’s most loose level since mid-2022 when Fed started hiking rates. Based upon the post Aug NFP fed speak and looking at US economic data in totality, we still believe in the 25*3 bps cut in REMCY24 with total 125 bps cuts by March’25 bringing the Fed rate to 4% which is the upper end of most of the market neutral rate estimates. After reaching this level we might see Fed finetuning rate cuts to bring it to 3.5% by end CY25. But US 1yr ahead 1yr US sofr is trading at 2.85% currently which we feel is an excellent level to get paid based upon above views. Markets might exaggerate but they cant remain disassociated from economic realities for long.
