Fed rate cut path to be ‘gradual and shallow’: Jefferies By Investing.com

The Federal Reserve’s rate-cutting path will be “gradual and shallow,” Jefferies strategists noted, as they believe the macroeconomic environment will remain resilient while inflation remains persistent.

For the past two weeks, analysts have argued that fears of a force landing are unfounded. While they anticipate some slowdown in employment data in the coming months, they believe this will align with a soft landing scenario. The case for an intermeeting cut or a 50bp cut in September was rejected.

Jefferies points out that market expectations for a September rate cut have fallen from a peak of more than 60bps to 32bps, while expectations for a cut in 2024 have fallen from almost 120bps to 92bps.

It points out that “September sale prices are now close to fair,” although there is some potential for further adjustment in December sale prices.

Analysts remain in the camp of 25 bps for September and 50 bps for the end of the year, but acknowledge the possibility of a risk premium if unforeseen problems arise that could require the Fed to take further action. Moreover, they maintain their position on December federal funds with a 75bp price target for the year.

On the stock side, analysts referenced late July valuations.

It is slightly above its late-July levels, and the NASDAQ is almost there, while the Eurostoxx is about 1% below its late-July level.

In credit, EUR IG Main is just 1bp higher than at the end of July.

Overall, Jefferies’ stance on risk assets remains positive, mainly due to a robust economy and expectations that both the Fed and the European Central Bank (ECB) will cut rates at their September meeting.

“We are in the camp of a gradual and shallow rate cut cycle as we believe the macro picture will remain resilient and inflation sticky,” the analysts wrote. “The market path is unlikely to be a straight line.”