Nick Smyth: why financial markets are pricing in interest rate cuts

<p>Markets and prices for a number of asset classes are currently behaving as they tend to around the time of a recession, says BNZ Interest Rate Strategist Nick Smyth.</p><p>Speaking in the latest episode of interest.co.nz's <a href="https://www.interest.co.nz/node/116346" target="_blank"><i><strong>Of Interest Podcast</strong></i></a><i><strong>, </strong></i>Smyth also says financial markets pricing in Federal Reserve rate cuts as soon as next year, despite the Fed's current aggressive hiking and US Consumer Price Index (CPI) inflation of more than 9%, suggests markets are worried about recession risk. </p><p>"The market has got circa 90 basis points of rate hikes over the remaining three [Fed] meetings this year, so still got the Fed hiking quite aggressively over the remainder of this year. And then next year it's pricing just over 50 basis points of rate cuts with the first rate cut fully priced by June," Smyth says.</p><p>"So why is that?"</p><p>"The logical way to interpret it would be to say markets are worried about recession risk. And I guess you can kind of see evidence of that in various parts of the financial markets," says Smyth.</p><p>"So for instance the S&P 500 is down more than 20%. That's that definition of a bear market. Bear markets are often, but let's be clear not always, associated with a recession. The US yield curve is inverted, which historically has been quite a reliable leading indicator of recession."</p><p>"We've got industrial commodity prices like copper, and copper's kind of used in lots of different things [and] historically that has been quite a good barometer of the strength of global demand. And that had fallen more than 30% from its peak," Smyth says.</p><p>"So you've got a number of asset classes that are behaving in a way they normally would in the lead up to, or around recessions. And this is taking place in the context of central banks really aggressively lifting interest rates over a short period of time, and in quite a synchronized manner."</p><p>Excluding China, whic