VIEW: JPM: Pricing For First Hike Seems Out Of Line With Fundamentals

J.P.Morgan note that alongside the Tsy market moves in the last few days, "the market's Fed expectations have repriced significantly. OIS forwards are now pricing a full 25bp hike by March 2023, at least 9 months earlier than the guidance we derive from the Fed's Summary of Economic Projections. While it's tempting to think the market is testing the Fed's commitment to FAIT, and the SEP forecasts are nearly 3 months old, we see no shift in tone from Fed speakers in recent days. In fact, today four separate FOMC members commented that it is too early to consider tapering asset purchases, much less lift rates off of zero. This sequencing is important: during the last cycle it was a full two-year period between the tapering announcement and the first hike in December 2015. We are sympathetic to the notion that the accelerated nature of the recovery could condense the timing between tapering and tightening, but the current pace of asset purchases is nearly double the pace observed during QE3 and will likely necessitate a longer tapering period. Moreover, the FOMC has articulated to markets that it will be careful to give advance notice before considering tapering as recently as the minutes of the January FOMC meeting. Thus, if the Fed is not close to tapering its asset purchases, it stands to reason that the market's pricing for the timing of the first hike seems out of line with fundamentals."