The US rates reversal playbook
We have written at length about the US Federal Reserve attempting to hike rates and the flow on effects that a series of hikes would unleash. We suggested that the Fed would be forced to firstly pause on any further rate hikes, and then ultimately reverse course. This is exactly what happened to the European Central Bank in 2011 when they hiked rates. Similar to the Fed move in Dec ’15, the market initially took the ECB at its word that the economy would improve, and made room in bond markets for further hikes before it became clearly evident that the hike was a policy error which would require reversal inside a fragile economy. US data has decayed considerably over January after last year’s rate hike, with manufacturing sector entering a recession. US dollar strength, the equity sell off and widening of credit spreads together imply financial conditions have tightened substantially. Deutsche Bank has an augmented Fed recession model which now predicts a 46 percent chance of a US recession in next 12 months. (VIEW LINK) (image source: Bloomberg)
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