Rising Expectations of Continuous Interest Rate Cuts by the Fed [ft Bull Steepening vs. Bear Steepening]

The domestic stock market has been surprisingly volatile over the past two days.

Yesterday, the market plummeted due to panic selling by individuals following the failure of the impeachment vote over the weekend. Today, however, it rebounded sharply as institutions stepped in, driven by expectations of economic stimulus from China and a slowdown in foreign selling.

Domestic institutions, including the National Pension Service, had little choice but to provide support. This was not only due to the actual situation surrounding domestic uncertainties but also because the market's trajectory itself resembled the kind of climactic plunge typically seen at the end of a bear market.

In particular, the exchange rate needed to stabilize and hold firm... it was a series of heart-stopping events.

Meanwhile, overnight, the probability of the US Federal Reserve cutting the benchmark interest rate in December has risen to nearly 90%.

Despite recent indicators suggesting that the US economy remains healthy, the US market is pushing for a rate cut, regardless of the reason.

While economic indicators remain robust, the market's current momentum towards a rate cut needs careful observation.

The article below discusses why the ongoing calls for rate cuts persist, even though US inflation indicators, while having eased somewhat, remain stagnant, and employment is abundant.

Among the points raised is the concern among US market participants about a 'slowdown in employment.' More and more participants are interpreting a slowdown in the recent trend of US non-farm employment data.

Furthermore, news from the US market yesterday indicates that bets are rising not only for a rate cut in December but also for a consecutive cut at the next FOMC meeting in January.

In the Fedwatch interest rate cut probability chart above, the probability of an additional cut in January, which I recall was almost non-existent some time ago, is now shown to be a not insignificant 13%.

There has been considerable contemplation about whether the US bond market next year will follow a ‘bear steepening’ or a ‘bull steepening’ trajectory.

Until November, due to the image many participants, including myself, had of Trump printing Treasury bonds once elected, long-term bond yields rose, and the yield curve (10-year - 3-month) normalized. This led to a higher likelihood of bear steepening. However, this view has changed after observing the trend after point A, the moment when the results of the US presidential election were finalized.

While the situation beyond next year is uncertain, for 2025, the likelihood of bull steepening, where benchmark interest rates fall rapidly and the yield curve normalizes, is increasing.

This also reflects the increased likelihood of a recessionary path in the US next year, rather than a rebound in inflation. Unless the 10-year US Treasury yield rises significantly, exceeding 4.5%, this trend is likely to continue.

The 2-year Treasury yield is currently finding support at around 4.11%, awaiting further developments. If it breaks below this level, the 10-year Treasury yield will likely fall further from its current position.

Looking at the 10-year yield chart above, at point A, the simultaneous appearance of 10-year and 5-year breakeven inflation rates represents a final resistance level that was not broken even during the peak of the Trump trade, similar to the 10-year yield.

This trend indicates a rapid reversal from the possibility of bear steepening to bull steepening in the bond market next year after the US presidential election.

As briefly examined in the news above, a strong 'predictable continuous interest rate cut' trend is emerging in the recent US market.

It's not simply about lower interest rates being beneficial... We need to pay attention to why these continuous expectations regarding interest rates are arising, and how the Federal Reserve is adjusting its course to match market expectations—a trend unlike what we've seen in the past.

This suggests a potential shift towards a recessionary phase in the US stock market in the near future, making it crucial for both US and domestic markets to exercise caution.