BofA warns Fed risks policy mistake with early rate cuts
Investing.com -- Financial markets may appear to be running hot, but Deutsche Bank (ETR:DBKGn) says it is wrong to conclude they are “priced for perfection.”
In its “Mapping Markets” report, Deutsche Bank pointed to the seeming contradiction that “equities are around all-time highs, and US IG spreads closed on Friday at their tightest since 1998,” which suggests strong optimism.
Yet, analysts noted that “over 100bps of Fed rate cuts are priced for the next 12 months, a scenario that’s more consistent with a slowdown or recession.”
That paradox has led many observers to argue that markets leave little room for upside.
But Deutsche Bank argued otherwise: “It’s wrong to suggest markets are priced for perfection. For instance, the recent US jobs report showed there’s still concern about an H2 slowdown, with payrolls barely positive in May and June. So if growth picks up, just like we saw after summer 2024, then a relief rally is very plausible.”
The bank also pointed to inflation dynamics as a potential swing factor.
“Markets are still pricing in a decent amount of inflation risk given the tariffs,” Deutsche Bank said. “So again, if that surprised on the downside like in late-2023, that would be another positive catalyst across multiple asset classes.”
In Deutsche Bank’s view, “the current outlook is more balanced than many give it credit, and the risks aren’t just skewed to the downside.”
While lingering inflation remains the main near-term challenge, the analysts added that if fewer rate cuts stem from stronger growth rather than higher inflation, “we know from recent history that risk assets can keep doing well in that setup.”