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9 Feb 2015
US might see a 100bp hike by end 2015-2016 – BAML
FXStreet (Barcelona) - The Team at BofA-Merrill Lynch, comments on the ongoing Fed rate hike scenario, and further forecasts US to see a total of 100bps hike for the end 2015-16 period.
Key Quotes
“The strong labor market lays the ground work for a Fed hike later this year.”
“As one would expect, rates spiked higher, led by the front end. The market is now pricing in lift-off in July, which is reasonable in our view given recent rhetoric from the Fed.”
“However, the market continues to price in a very slow pace of hikes and a low terminal rate (2.3%, albeit higher than 2% priced in a week ago).”
“We do not argue with the low terminal rate priced in due to the risk of a Fed policy mistake of tightening in the midst of weak global growth and disinflationary forces. However, we cannot justify the slow pace of hiking pricing in, at least initially.”
“The Fed’s Statement of Economic Projections implies a pace of 125-138bp in hikes between December 2015 and December 2016.”
“Our economists project a 25bp hike every other Fed meeting, which translates into 100bp of hikes for the end 2015-16 period.”
“Meanwhile the Eurodollar curve is pricing in only 80bp of hikes for that period. Note this spread was as high as 110bp even in early December.”
“Thus we recommend EDZ5-EDZ6 steepeners. We see the risk reward of the steepener as being relatively asymmetric, with the range over the near term being 70-100bp.”
Key Quotes
“The strong labor market lays the ground work for a Fed hike later this year.”
“As one would expect, rates spiked higher, led by the front end. The market is now pricing in lift-off in July, which is reasonable in our view given recent rhetoric from the Fed.”
“However, the market continues to price in a very slow pace of hikes and a low terminal rate (2.3%, albeit higher than 2% priced in a week ago).”
“We do not argue with the low terminal rate priced in due to the risk of a Fed policy mistake of tightening in the midst of weak global growth and disinflationary forces. However, we cannot justify the slow pace of hiking pricing in, at least initially.”
“The Fed’s Statement of Economic Projections implies a pace of 125-138bp in hikes between December 2015 and December 2016.”
“Our economists project a 25bp hike every other Fed meeting, which translates into 100bp of hikes for the end 2015-16 period.”
“Meanwhile the Eurodollar curve is pricing in only 80bp of hikes for that period. Note this spread was as high as 110bp even in early December.”
“Thus we recommend EDZ5-EDZ6 steepeners. We see the risk reward of the steepener as being relatively asymmetric, with the range over the near term being 70-100bp.”