With the continuous surge in US bond yields, there has been a growing call in the market recently for the Federal Reserve to slow down or even pause interest rate cuts. And Torsten Slok, Chief Economist of Wall Street asset management giant Apollo Management, has recently joined the ranks
Slok stated in a report released last weekend that with the strong growth of the US economy, the likelihood of Fed officials keeping interest rates unchanged in November is increasing.
Slok believes that there are many reasons why the US economy is expected to remain strong - the dovish stance of the Federal Reserve, high stock and housing prices, narrowing credit spreads, and "extremely open" corporate financing in both public and private markets are some of the positive factors.
He wrote in the report that the bottom line is that economic expansion is still ongoing. He believes that the United States is still on a 'no landing' track - with sustained economic growth and a resurgence of inflation.
Slok also mentioned the famous Atlanta Fed GDPNow model, which currently predicts that the US gross domestic product (GDP) is expected to grow by 3.4% in the third quarter.
Undoubtedly, Slok's above viewpoint echoes the increasingly cautious voices within the Federal Reserve regarding interest rate cuts.
Kansas Federal Reserve Chairman Schmid said on Monday that given the uncertainty of how low the Fed should ultimately lower interest rates, he is inclined to slow down the pace of rate cuts. Dallas Fed President Logan also pointed out that due to various uncertainties in the economic environment, the Fed should remain cautious in cutting interest rates, and she supports adopting a "gradual" approach to rate cuts. Minneapolis Fed's Kashkari emphasized that he is currently inclined to lower interest rates at a slower pace in the coming quarters.
As economic data continues to show that the US economy is hovering in a "no landing" scenario, US bond yields have also continued to rise sharply recently. On Monday of this week, the yields of US Treasury bonds of various maturities experienced a widespread surge of double-digit basis points. Puxin Securities even believes that with rising inflation expectations and shallow interest rate cuts by the Federal Reserve, it is not ruled out that the 10-year bond yield will test the 5% level in the next six months.
In this regard, Slok carefully listed the top ten tailwind factors currently present in the US economy in the report:
1) Dovish Federal Reserve;
2) The dovish stance of the Federal Reserve and the narrowing of credit spreads;
3) Widely open public and private financing markets;
4) The Chip Act, Inflation Reduction Act, Infrastructure Act, and defense spending continue to support economic growth;
5) Consumers lock in low interest rates in advance, resulting in low debt repayment costs;
6) Locking in low interest rate corporate debt has lower debt repayment costs;
7) Geopolitical risk mitigation;
8) The uncertainty of the US election is about to pass;
9) Continued strong spending on artificial intelligence, data centers, and energy transformation;
10) After the Federal Reserve cut interest rates in September, there were signs of a rebound in construction orders.
Slok believes that these 10 positive factors are increasing the likelihood of the Federal Reserve reversing direction at its November meeting.
After Monday, the interest rate market has further lowered its forecast for the Fed's rate cut this year. The latest pricing shows that the Fed will cut interest rates by 39 basis points in the next two policy meetings (the probability of skipping a meeting to cut interest rates is getting closer to 50%), while the pricing at the end of last Friday was 42 basis points.
At present, early November is destined to be a crucial moment for igniting the year-end market trend. The employment report for October in the United States will be released on November 1st, the US election will be held on November 5th, and the Federal Reserve will announce its interest rate decision on November 7th local time.