Barclays recommends positioning for higher US interest rates. Here’s why
2024.10.18 07:16
Investing.com — Investors should be positioning for interest rates in the US to be higher in the coming months, according to analysts at Barclays.
In a note to clients, the analysts argued that incoming data this week point to the resilience of the US economy, a trend that may decrease the need for the Federal Reserve to ratchet down borrowing costs “materially”.
The Fed reduced rates by an outsized 50 basis points in September. Markets have priced in additional cuts at upcoming meetings of the central bank, although figures earlier this week showing a higher-than-anticipated retail sales and a drop in weekly jobless claims has fueled wagers that any rate-cutting may be at a slower pace than initially expected.
Some policymakers have suggested a desire to continue slashing borrowing costs, with San Francisco Fed President Mary Daly recently noting that “[p]eople want to know, where will the rate settle […] But the truth is, we’re a long way from where it’s likely to settle.”
Even still, the Barclays analysts said that because the incoming economic numbers do not indicate the current level of the policy rate is exerting much drag on the broader economy, rates are “likely not far from where they should settle.”
“Hence, the Fed’s reaction function remains quite dovish in the context of the data. This argues for higher term premium out the curve, to reflect the upside risk of these cuts being unwound,” the analysts wrote. “We have been recommending positioning for higher far forward rates and we maintain that view.”
They also said that rates markets will be closely watching the outcome of the US presidential election, with online prediction platforms currently leaning towards a victory for Republican candidate Donald Trump and his party winning control of Congress.
In such an event — dubbed a “Republican sweep” — “yield levels should be higher across the curve as investors focus on a material expansion of fiscal deficits (via extension of the Trump tax cuts) leading to higher term premium,” the Barclays analysts said.
“In addition, inflationary policies via across-the-board tariffs and tighter immigration would lead the market to pare back the pace of Fed cuts.”
