FAST FIVE: Nomura Hikes Fed 'Terminal Rate' Forecast, Warns "Everything Else Is An Emerging Market"
Consequently, we have revised up our “Terminal Rate” forecast by 75bps to 5.25-5.50% and now expect rate hikes of 75bps in Nov and Dec '22, followed by 50bps in Feb and 25bps in Mar '23.
We continue to expect cuts to start in Sep '23, at an initial pace of 25bps per meeting; however, after five 25bps cuts (three in '23, two in '24), we now expect the Fed to accelerate the pace in Q2 2023 to 50bps / meeting as the risk of inflation rebounding diminishes, resulting in an end-2024 policy rate of 1.125% And as Nomura's Charlie McElligott notes, the market continues resetting the Fed's “Terminal Rate” higher (Apr23 Fed Funds now implying ~4.80).
And adding to the collective macro mess, there is the additional calamity emanating out of both the UK and Europe as well, as collapsing Currencies create a doom-loop of hastened / escalated Central Bank Rate hike projections, with both governments pursuing looser Fiscal policy to offset the (negative) Energy- and Growth- shocks.
The last month's FX performance against the dollar – amid widening rate-differentials and soaring current account deficits in the rest of the world on “exported inflation” and the energy crisis – McElligott risibly comments that “everything else is an emerging market.” And if you thought – well it can't get any worse, surely The Fed will stop now.
And as the green box shows above, the 'levels to buy' will need a serious squeeze before any flip is realized.