Bond Investors Making Bold Bets on Future Fed Rate Cuts

Bond investors are making more bold bets that the Federal Reserve could cut interest rates at some point in 2019. While economic data is portraying a solid picture of growth, the capital markets are getting roiled by a volatile May with U.S.-China trade spats coming to the forefront.

Despite what the stock market is saying, some Fed officials are not forecasting a rate cut just yet.

“Confidence, especially business confidence, is fragile. It’s our job as policy makers to try to support it,” said Richmond Fed President Tom Barkin in a speech earlier this month. At the same time, he told reporters, “there’s not a strong case to move [rates]lower when growth remains healthy.”

The U.S. economy rebounded in the first quarter this year, beating analysts’ expectations of 2.5 percent growth with a 3.2 percent growth number.

The GDP figure represents the strongest rate of growth for the first quarter in four years and matches the 3.2 percent growth experienced a year ago.

“While the (first quarter) boost from net trade and state and local government spending is unlikely to be repeated in [the second quarter], the main message is that private consumption and investment are slowing down only gradually,” said Brian Coulton, chief economist at Fitch Ratings, in a statement.

Exports helped to drive growth in the first quarter as a a decline in imports and higher inventory investment offset weaker consumer spending and business investment, according to the Commerce Department on Friday.

“The upside beat was helped by net trade (exports jumped while imports contracted sharply) and inventories which combined contributed almost 170 bps of the rise,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group. “Personal spending though, the biggest component was up just 1.2%, two tenths more than expected as an increase in spending on services and nondurable goods offset a decline in spending on durable goods.”

Despite strength in the U.S., the global outlook is different. Earlier this year, the IMF cut its global growth forecast to the lowest level since the financial crisis, citing the impact of tariffs and a weak outlook for most developed markets.

According to the IMF, the world economy will grow at a 3.3 percent pace, which is 0.2 percent lower versus the initial forecast in January.

“At this point, I’m a little concerned about global growth generally,“ said Dallas Fed President Robert Kaplan in an interview last week. He didn’t address any policy implications of a darkening outlook for trade conflicts. ”I’m not sure I have a great insight other than, I’m watching it,” he said.

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