Goldman Sachs predicts that the Federal Reserve will begin reducing interest rates in September, expecting three consecutive 25 basis point cuts by the year’s end. This outlook assumes that inflation expectations remain stable and do not increase again.
The bank notes that if inflation trends continue as they are, a gradual shift in policy could occur. With this projection, market pricing is leaning more dovish. Should inflation expectations remain controlled, short-term yields might decline further. This would support risk assets, notably within rate-sensitive areas such as technology and real estate. Additionally, the dollar could experience further downward pressure, while gold and emerging market assets might benefit from a more accommodating Fed policy direction.
Derivative Strategy For Falling Yields
Given the expectation of rate cuts, we see an opportunity to position for falling yields by using derivatives like long positions in Secured Overnight Financing Rate (SOFR) futures. The CME FedWatch Tool currently indicates a market-implied probability of over 60% for a rate cut by the September meeting, which adds credibility to this strategy. This approach allows for a direct bet on the anticipated shift in monetary policy.
We believe that purchasing call options on rate-sensitive equity sectors, particularly technology and real estate ETFs, is a prudent way to gain upside exposure. The latest Consumer Price Index report for May showed inflation cooling to a 3.3% annual rate, supporting the case for easing that would benefit these assets. Historically, the start of non-recessionary easing cycles, like the one in 2019, has been a significant catalyst for growth stocks.
Options And Currency Strategies
With the CBOE Volatility Index (VIX) recently trading near lows around the 13 level, the cost of options is relatively cheap. This environment makes it tactically attractive to build long-dated bullish positions or buy protective puts at a discount. It allows us to structure trades with defined risk ahead of the central bank’s projected pivot.
To capitalize on a potentially weaker U.S. dollar, we are evaluating put options on dollar index ETFs or call options on gold. A more accommodative policy stance tends to diminish the dollar’s appeal, which often provides a tailwind for commodities priced in the currency. In the year after the Federal Reserve began its last easing cycle in mid-2019, gold prices rallied by more than 20%.
