(Bloomberg) -- State Street Global Advisors is bucking the recent hawkish shift in market consensus to bet that the Federal Reserve will cut interest rates by 50 basis points as soon as June.
The $3.6 trillion asset manager thinks the Federal Reserve will front-run monetary easing ahead of the US presidential election in November. By the end of the year, the firm expects reductions to total 150 basis points — two and a half times what markets are currently pricing.
A string of robust US economic data including Friday's blowout US jobs report, alongside commentary from policymakers that rate cuts may not be needed at all, has driven the repricing in easing expectations and lifted Treasury yields to a four-month high. But State Street maintains the economy is not as strong as it seems, with indicators like credit card delinquencies and the cost of credit to small businesses pointing toward a downward turn later this year.
“The market is underplaying the likelihood of deeper cuts,” Lori Heinel, State Street's Boston-based chief investment officer, said in an interview. “There's a lot to suggest that this is still a very fragile recovery despite the fact it continues to look resilient on the surface.”
Heinel contends inflation easing closer to 3% is not consistent with policy rates being so high. She sees the US election in November driving the Fed to cut rates in more sizable chunks than the market is expecting.
“There's a compressed time horizon here,” she said. “Obviously the Fed will say they are not political but there will be a lot of scrutiny and they won't want to be active in that window right around the election.”
State Street has held firm in its outlook amidst big swings in opinion from the rest of the market. Back in October, the firm was also bucking consensus as a higher-for-longer mantra swept bonds. That changed later in the year when most investors switched to bet on big rate cuts.
The asset manager continues to be overweight US stocks and long-duration sovereign bonds with a preference for Treasuries, as the strength of the US dollar puts the firm off allocating overseas. Heinel sees the move down in bond yields as likely to be bumpy, given ballooning government deficits, so has upped the firm's allocation to gold.
“Volatility in fixed income has been heightened so you want to look for shock absorbers,” she said. “Those typically would be inflation protection assets like gold but we're buying through the lens of diversification, not inflation protection.”
--With assistance from James Hirai.
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