Goldman Sachs: Fade Front-Loading Of Cuts In US Front End

Late on Friday Goldman Sachs wrote “with roughly 135bp of easing priced by December 2024 (and nearly 60bp of cuts to the Fed funds rate by next June), we think markets are approaching the limits of what can plausibly be priced without attaching material odds of a recession in the near term.”

• “It appears to us that markets are overinterpreting Fed governor Chris Waller’s comments.”
• “In our view, the Fed will likely have some inflation risk management considerations in mind that should limit how aggressively it might ease. If it were to ease in line with current market pricing in the absence of clear recessionary signals, and solely because of inflation normalization, there would likely be further significant easing of financial conditions, increasing the risk of a reacceleration of the economy.”
• “Given that the current growth slowdown will still leave it at roughly around trend next year, a reacceleration would likely be inflationary and therefore perceived as unwelcome by the Fed.”
• “We therefore recommend taking profits on our received 1y OIS position, and instead recommend fading some of the front-loaded cut pricing by selling June 2024 SOFR (SFRM4 95.25) calls.”
• The recommendation came with an entry of 35.0 (last 32.0), targeting a move to 10.0 with a stop set at 50.0.