One of the topics of conversation on the golf course this weekend was whether the bond mkt was too dovish vis a vis Fed policy for this year.

I then open my Bloomberg and see comments from Philipp Hildebrand, Vice Chairman of Blackrock and the ex head of the Swiss National Bank. He says "traders wrong on rate cut bets" and goes on:

"I don't see any chance, frankly, of easing this year. I think the market has got that wrong." Bloomberg adds: "While Hildebrand expects inflation to fall from multidecade highs, central banks globally will look to chase it down to 2% and make sure prices expectations don't rear up again. He added "At best we are going to see some sort of pause but not yet."

I find myself very much in alignment with Hildebrand. My take on the fast money crowd on Twitter is they are very much taking the other side of this trade expecting a quick fall in inflation (I saw some reference the 'deflation' we saw in December).

I also think there is a little reading into the price action. As I mentioned in my Substack, there were more than a couple types of investors that are pretty happy with a 2 year yield near 4% and were buying.

This means the street is probably hedging around that flow and so the prices may also be somewhat indicative of the end-user flow and a little less of the fast money views. Either way, the market and the Fed do not see eye to eye.

In the top chart we can see the FOMC sees rates in 2023 somewhere around 5.125-5.375%. It does see a move lower in 2024 but the range is still very wide with prices anywhere from 3.125 to 5.125%.

In the bottom chart, the mkt disagrees. You need some math here (1 minus price) but we see the mkt sees peak Fed Funds just south of 5% in 2023 with cuts starting in the summer & year end Fed at 4.57%.

It then sees rates continuing lower in all of 2024 from 4.5 to 3%. While this fits in the wide Fed range it is also more dovish than the 4.125% avg we see from the dots.

So the mkt is clearly more dovish than the Fed, on peak rates, on the timing of rate cuts and the magnitude of rate cuts. Something has to give.

Last year, we saw JayPo explicitly tell the mkt it is wrong. Should we expect that on Feb 2 at the next FOMC? Before that so there is no surprise?

A lot of the bullish story hinges on peak Fed hawkishness, which plays its way thru yields to mkt multiples. Where the mkt settles on peak Fed Funds matters for all assets.

It is best to ...

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