‘Summer of the Bond Market’ Is Teed Up for Warsh, Goncalves Says
As new Federal Reserve Chairman Kevin Warsh leads his first policy meeting, falling oil prices are set to smooth the way for a rally in fixed income, according to MUFG’s chief of US macro strategy, George Goncalves.
“We are entering a summer of the bond market,” Goncalves said Wednesday on Bloomberg Television’s Surveillance. “In general there’s not really an inflation problem.”
Investors are now reassessing the outlook for global interest rates, Goncalves said, with crude slumping over the past week on expectations of an end to the supply crisis thanks to the pending US-Iran agreement to reopen the Strait of Hormuz. Goncalves said that oil prices “managed to stay contained” even with a billion barrels locked out of the market because of the waterway’s closure.
As a result, a second wave of higher oil prices is now unlikely, which means price pressures should subside, he said. Two-year Treasury yields, which reflect market expectations for Fed policy, have fallen from a closing high of more than 4.16% on June 8. Crude futures briefly touched a fresh three-month low on Wednesday.
At the same time, Goncalves cautioned that market participants should “temper their enthusiasm” on what Warsh will set out to achieve in the early days of his tenure. “We don’t see a drastic change at the Fed starting off today. He’s gonna start pivoting the Fed differently and that is going to rearrange the focus.”
Moreover, there still is uncertainty about what happens now between the US and Iran, which will influence Warsh and Fed policy going forward.
“Let’s see what happens with the MOU,” he said, referring to the memorandum of understanding being struck by the US and Iran. If oil prices and inflation have truly peaked, “you can open up a window to cut rates at the end of the year.”
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