US | Markets price in an imminent end of the hiking cycle

Summary

There are initial signs that banking turmoil achieved what Fed’s hawkish rhetoric couldn’t: tighter credit financial conditions. As Powell said, “it doesn't all have to come from rate hikes, it can come from tighter credit conditions.”

Key points

• Key points:
• The yield curve is pricing in that the Fed is likely finished raising interest rates and that sooner rather than later will begin to cut rates as signs of economic weakness build.
• Market-based inflation expectations have remained relatively stable around low levels even though the progress on inflation has been slower than most anticipated.
• The 10y-3m Treasury yield spread continues to trend lower, but the 10y-2y spread edged up as markets bet the hiking cycle is likely done. Overall, spreads continue to signal that a recession will come soon.
• Markets are not only pricing in that the end of the hiking cycle is in sight, but also that the Fed will soon need to reverse course and begin to cut rates in the second half of this year.

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