Goldman: Renewed Bank Fears And Dovish Fed Deepen Front End Inversion

Goldman Sachs note that “there are over 100bp of Fed cuts priced. We do not see a compelling rationale for this repricing. While we agree that the Fed’s concern about tightening of credit conditions makes it less likely to push the terminal rate much higher, and perhaps more likely to ease once inflation has moderated materially, the pre-existing inversion in the forwards was already consistent with this possibility, in our view.”

• “Fundamentally, we continue to believe that the front end inversion is deeper than warranted, largely on account of our more positive outlook on the economy when compared to the Fed’s (or consensus) baseline economic projections.”
• “Although our economists do expect the banking system stress will translate to a 0.25-0.50% drag on GDP growth, that would still leave growth at roughly 1.2% for the year (compared to the Fed’s 0.4% estimate). Of course, a more serious downside scenario is a distinct possibility, but markets appear to already be assuming high odds of such a scenario, and attaching lower odds to scenarios where the impact of credit tightening is more contained. Barring continued banking system stress, the economy should prove resilient - the bar to beating the Fed’s projections isn’t that high - and the odds of scenarios with fewer cuts or further rate hikes than currently priced should rise, reducing the extent of inversion at the very front end.”