(Bloomberg) -- Citadel Securities says a strong US economy and sticky inflation will lead the Federal Reserve to cut interest rates only one more time in 2024.
“I’ll go out on a limb and say we only end up seeing 25 basis points of cuts for the rest of year,” Michael de Pass, global head of rates trading at Citadel Securities, said in an interview with Bloomberg Television. The market “is still implying 50 basis points of cuts for this year. When we look at it, whether it’s the strength of the underlying economy or the stickiness on the inflation front, that feels a bit too high.”
In the wake of strong US job creation for September, swaps traders have trimmed their outlook for further Fed rate cuts, now pricing in about 47 basis points of reductions through the end of 2024. Prior to the employment report, they were seeing around a three-quarter point cut by year-end. De Pass says that adjustment makes sense, yet it remains still too aggressive.
The next litmus test on inflation comes Thursday with a reading on US consumer prices for September. Consumer prices, excluding food and energy, is predicted to have rose at a 3.2% annualized pace last month, according to a consensus of forecasts compiled by Bloomberg.
“That’s still well above target and leaves the Fed with a dual mandate to manage,” de Pass said from the Citadel Securities Global Macro Conference on Wednesday. “We’ve seen a quite strong payroll report last week and the attention now turns to inflation once again. We have to be concerned about inflation maybe not getting to target — and how is that going to change the Fed’s reaction function.”
Federal Reserve Bank of Dallas President Lorie Logan said in prepared remarks for an event on Wendesday in Houston that the central bank should lower rates at a slower pace following September’s half-point rate cut.
If the Fed cuts by what Citadel Securities sees over the rest of this year that’s set to “have an impact on the very short end of the curve,” de Pass said. Overall, “there’s room to trade this market tactically and I think that’s really going to be the biggest message and dynamic going forward.”
Treasury yields sharply rebounded after last week’s job report pushed US bonds lower, with the benchmark 10-year yield now hovering just over 4% from as low as 3.6% about a month ago. That has come as futures positioning metrics show wagers on Treasury losses start to emerge. Ten-year yields rose Wednesday by about 4 basis points.
Bond market volatility has jumped amid the recalibration of the outlook for the Fed’s rate-cutting path. The ICE BofA MOVE Index — a gauge of volatility that tracks anticipated swings in yields based on options — surged on Monday to its highest since January.
De Pass predicts a heightened pace of Treasury yield swings to continue.
“The economy is in a bit of an inflection point, there are a lot of cross currents,” he said. “I think you are going to get an opportunity to trade in what we expect to be material volatility going forward.”
(Updates with 10-yield move in 8th paragraph. Earlier version corrected spelling of Citadel Securities in first paragraph.)
©2024 Bloomberg L.P.