Market Update | July 25, 2022

It is chancy to reason that a current trend will continue indefinitely. Linear patterns may persist for a while, but they’re bound to collapse eventually to cyclical twists and turns. Life experience teaches us that in the most personal ways. The financial markets reveal it too, among countless other aspects of our world.
The most interesting financial news headline today, in my opinion, is an example of a linear trend succumbing to cyclical motion. Per the Wall Street Journal: “Investors bet Fed will need to cut rates next year. As the Fed prepares to meet this week, investors are betting officials will raise rates aggressively through year-end, then start cutting in six months.”
The article discusses professional investors’ predictions about where the federal-funds rate will be at various points in upcoming months. The conclusions are drawn from interest-rate derivatives, such as overnight index swaps. As of Friday, they implied investors expect the Fed to raise rates by three-quarters of a percentage point on Wednesday, then eventually to around 3.3% by the end of the year. Investors expect no further increases after that and, in fact, short-term rates to fall to roughly 2.5% by the middle of 2024 as many expect a heightened recession risk.
These conclusions indicate economic crosswinds. It may have been a foregone conclusion that rates will do nothing but go higher. Indeed, the broader lesson for today is simple: a trend can and will change.

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