Earlier today, we noted that according to Nomura (and not only: over the weekend Morgan Stanley said it “Senses A Shift In Tone From The Fed”) – based on last week’s commentary from both Chair Powell and vice Chair Clarida – the Fed’s tightening cycle is effectively over.
This has been observed in the rates market, with the Treasury curves now bull steepening, as prior market expectations of future hikes are removed from the front-end. Meanwhile, a wave of dovishness has washed across the Eurodollar curve, with EDZ8Z9 implying just 35bps of hikes; EDH9H0 (March ‘19 / March ‘20) 25bps of hikes; and – as we noted last week – the EDZ9Z0 at -2bps indicating Fed EASING on the margin in 2020.
But, as we noted earlier, before bulls rejoice and bid up stocks into this Fed’s relent, Nomura’s Charlie McElligott notes that even though a Fed pivot “less hawkish/more dovish” elicits “bullish” muscle-memory in Equities, traders should remember why it’s happening: “because growth is decelerating, fiscal stimulus impacts are rapidly diminishing, financial conditions are net / net “tighter” and policy nearing the level where it is no-longer “stimulative”.
He then adds ominously, “this further cements my long-discussed investor “psyche shift” from the prior risk-POSITIVE “we are growing faster than we are tightening” to the risk-NEGATIVE one where “we have tightened ourselves into a slowdown.”
Meanwhile, as the curve bull steepens, “value” stocks are emerging as the winner, as growth stocks are repriced lower.
Indeed as McElligott said, “global Equities “Value” factors measures up across the boards overnight, per our European- and AsiaPac- factor monitors”. But it’s not just fundamentals that are behind the move, however: so are technicals according to Nomura:
