A reduction in U.S.-China trade barriers may decrease the risk of a severe supply-driven inflation shock. However, inflation remains persistent, delaying the Federal Reserve’s rate cuts until no earlier than December, according to Deutsche Bank economists.

Despite the easing trade tensions, analysts believe inflation will stay at high levels, preventing rapid rate cuts by the Fed. Deutsche Bank maintains that its outlook aligns with a December timeframe for the Fed’s first rate cut this year.

Goldman Sachs also revised its expectation, now predicting a Federal Reserve rate cut in December instead of July. Meanwhile, Citi anticipates a cut in July rather than June.

Economic Forecasts for Rate Cuts

This portion of the article outlines how easing trade hurdles between the U.S. and China might help limit any sharp spikes in prices, particularly those caused by supply disruptions—think components, raw materials, and manufacturing chain bottlenecks easing up slightly. However, inflation nationally remains elevated—not surging suddenly, but not dropping quickly either. This stubbornness adds pressure on central bank policymaking, and according to Deutsche Bank, it means the first reduction in interest rates is pushed towards the end of the year rather than the summer. They’re not alone—Goldman also shifted their rate cut view later to December, whereas Citi stands out as still expecting an earlier move, now seeing July rather than even sooner in June.

With monetary policy expectations sliding further down the calendar, the implications for us watching rate-sensitive instruments are fairly direct. Although worry about supply chain issues is retreating somewhat, the sticky nature of inflation keeps policy-makers cautious. We ought to read into this: the probability of rate cuts affecting forward rates, options pricing and leveraged yield strategies within the near-term window has lessened. Betting on lower rates this summer, especially in highly time-sensitive positions, now carries considerably more risk.

From our seat, the divergence between forecasts is worth noting. While Deutsche and Goldman are gradually becoming more dovish—albeit on a delay—someone like Buiter’s team still sees earlier relief. That variance is narrowing, but the market hasn’t digested it equally. We might start to notice more re-pricing in the short-to-medium end of swap curves and futures.

Monitoring Macroeconomic Indicators

Pay attention to incoming macro data in the next few weeks. Anyone holding duration-sensitive derivatives should assess how housing and wage pressures develop—core inflation figures tied to services may not dip fast enough to shift the Fed stance early. Strong payroll reports or consumer confidence gains could keep upward pressure on rate expectations.

Moreover, volatility implied in short-dated options, particularly those straddling July FOMC, seems likely to move as the debate between sooner-or-later cut camps continues. Trading strategies placed around that meeting date might be at risk from adjustments as conviction around the timing stiffens or weakens, depending on the stream of economic indicators.

For positioning, we should be strategic rather than reactive. Given the slower-than-expected pace of disinflation, and with market-based rate cut expectations slowly aligning around year-end, shorter-dated bearish trades on rates may have more justification in the next cycle. Those anticipating earlier moves may find reward thin unless data strongly surprises in the downside direction.

Watch the data, not the noise. Don’t lean too far into optimistic projections of early easing—stick to the contracts that benefit from delay.

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