Investors now believe fed rate-cut outlook too optimistic: UBS

Investing.com — Investors now believe that even the Fed’s expectations to cut rates by 200 basis points over the next two years are too optimistic as stronger economic data continue to put recession worries on ice, according to the latest research note from UBS.

“The market is now pricing fewer rate cuts than the Fed’s projections, which is a significant shift from just a few weeks ago,” UBS strategists said in a Tuesday note.

The market expectations for rate cuts have been significantly scaled back following recent economic data that has surpassed expectations, the strategist said. The market is now pricing in just 70 basis points of cuts for 2024, compared to the Fed’s projection of 100 basis points.

The shift away from overly dovish expectations has been driven by resilience of the U.S. economy, particularly in the labor market. The September jobs report showed a robust increase of 245,000 jobs in September, well above the 150,000 expected, while the unemployment rate unexpectedly ticked lower to 4.1%.

The strength in the labor market and ongoing inflation readings showing price pressure persist, has led investors to believe that the Fed’s own expectations — of 200 basis points of cuts for the cycle —  are too optimistic as rates may need to remain higher for longer than previously anticipated. 

“Not only has the market re-adjusted the path for the remainder of the year but it has taken the total cycle cuts down from 220bps to 150bps—below even the Fed’s SEP guidance of 200bps,” UBS said.