Yields Climb on Waller’s Comments, While Global Leaders Descend on Davos

Rates jump 12+bps after hawkish Fed comments. UST yields rose 5-10bps across the curve immediately after 2024 Fed voter Waller offered hawkish comments. Swap rates and Treasury yields closed 8-12bps higher across the curve, driving 3y and 10y Treasury yields above 4%. The moves drove further curve steepening – the 2s10s spread is now at its widest since October 2023. Meanwhile, Fed Funds futures now suggest a ~70% chance for a cut by the March FOMC meeting, a ~15% decline from Friday. The dollar surged 0.83% on the hawkish sentiment, its largest intraday gain since March.

Christopher Waller argues against current market expectation for six 2024 rate cuts. Futures markets have priced in a baseline expectation of 6+ rate cuts in 2024 for weeks now, despite the most recent FOMC Dot Plot (from December) reflecting a median of 3 rate cuts. Fed Governor Waller pushed back against current market pricing, as he stated, “With economic activity and labor markets in good shape and inflation coming down gradually to 2%, I see no reason to move as quickly or cut as rapidly as in the past.” He did acknowledge that the Fed should be able to commence rate cuts this year, though he said it should be done “methodically and carefully.”

Davos participants signal economic optimism. The annual melting pot of heavy hitters across the private and public sectors known as the World Economic Forum (WEF) commenced yesterday in Davos, Switzerland. Among the many topics already addressed were global economic outlooks, the impact of AI, and the conflict in Gaza. So far, participants have been largely bullish on the global economy. Please see below for selected quotes from conference attendees:

Bank of France Governor Francois Galhau: “One year ago, the fear here in Davos was that we would have inflation and recession…we will possibly escape both.”

Deutche Bank CFO James von Moltke: “the resilience of not just the economies, but also the financial markets, to the geopolitical crises that are going on, to the rise in interest rates and the fight against inflation, has been remarkably strong.”

IMF Official Gita Gopinath: “We feel like a soft-landing scenario…the probabilities have gone up quite a bit because we’ve had inflation come down without needing that much of a loss in terms of economic activity.”

Bank of America CEO Brian Moynihan: “You’re going to have 80 CEOs over the next few days, they’re going to talk about what they do and how they invest, that’s what drives the U.S. economy and so the Fed’s got to get normalized and get out of the way.”

Former IMF Chief Economist Ken Rogoff: “If we get a deep recession, and it definitely could happen – how’s it going to happen, I don’t know, but 25% chance it happens – well [the Fed] will cut rates a lot. Not six times, they could cut rates 15 times.”

Institute of International Finance CEO Tim Adams: “We have the highest levels of debt in a non-war period in modern history, and it’s at the corporate, household, sovereign, sub-sovereign [levels].”

State Street CEO Ron O’Hanley: “I think central banks – in terms of their responses to inflation – they’ve done actually a pretty good job with a lot of uncertainty.”

Bridgewater Co-CIO Ray Dalio: “If we’re looking at the politics, the geopolitics, I don’t think that those risks are priced in, because it’s a difficult thing to play…the most important thing is that we are strong, and that we work well together. Our greatest risk is not China. Our greatest risk is ourselves.”

Premier of China Li Qiang: “In promoting economic development, we did not resort to massive stimulus, we did not seek short-term growth…rather we focused on strengthening internal drivers…the Chinese economy can handle ups and downs in its performance. The overall trend of long-term growth will not change.”

Prime Minister of Qatar Sheikh Mohammed al Thani: “[The international community should not focus] on just small conflicts, we should focus on the main conflict in Gaza. And as soon as that’s defused, I believe everything else will be defused.”

President of European Commission Ursula von der Leyen: “Russia is failing on strategic goals…it is first and foremost a military failure…Russia’s failure is also economic.”