Goldman Sachs thinks that there is currently an overly optimistic mood in the financial markets regarding the possible range of interest rate cuts by the Federal Reserve next year.
Against the background of the specified emotional background, option traders have the opportunity to make a profit by betting despite more restrained or optimistic views on the future. Currently, the cost of the cuts is approximately 1.25 percentage points over the coming months. There are expectations that by June the mentioned indicator will decrease by about half a percentage point.
Goldman Sachs analysts say that the economy of the United States has already come as close as possible to the boundary beyond which the recession begins. The corresponding conclusion about the current state of the American economic system is contained in a note by experts of the mentioned organization, published at the end of last week.
The specified note contains a more aggressive forecast about the future dynamic of the United States economy compared to the basic vision of the situation by Goldman Sachs analysts, which provides for a decrease in the mentioned indicator by a quarter point next year. Experts say that the markets are approaching the limits of what can be reasonably estimated without taking into account the significant chances of a recession in the foreseeable future.
Goldman Sachs strategists recommend selling the SOFR call option for June 2024 for 95.25 rupees as a bet against some discounted pre-loaded prices. The option is linked to the Overnight guaranteed financing rate, which reflects expectations about the Fed’s policy vector. The validity period expires on June 14, two days after the central bank’s statement on the strategy of activity.
In recent sessions, traders have been increasing their assessment of rate cuts in 2024 in the futures, options, and cash markets.
Data from the Commodity Futures Trading Commission, which was released late last week, indicates that net leveraged positioning in SOFR futures has been extended to a new record level.
At the same time, bets appeared in the sphere of options which aim to reduce rates by a total of 250 basis points by September, which is about 150 basis points higher than the current estimate in the swap market.
The results of the JPMorgan Chase & Co. Treasury client survey, conducted weekly since 1991, indicate that the most active investors in the cash market are optimistic, and their degree of confidence is unprecedented.
The price dynamics recorded on Monday, December 4, partially reflected the emotional background, as a result of which the aggressive reduction in rates for 2024 was weakened. The yield on two-year bonds rose by about 10 basis points. The aggressive rally at the end of last week led to a decrease in the yield of these bonds by 14 basis points. This was facilitated by ISM production data, which turned out to be weaker than preliminary expectations.
Goldman Sachs strategists say that the scale and initial cost of mitigation, which is currently being estimated, is probably excessive.
As we have reported earlier, Goldman Sachs CEO Says About Risk of Prolonged Inflation.