Markets Price In Rate Cut, But UniCredit Warns of Fed Surprise
While CME FedWatch tool shows near 90% chance of easing, the Italian bank's contrarian forecast for a hold introduces risk of a hawkish shock to equities.
Investors are entering the final weeks of the year with a near-certain expectation that the Federal Reserve will deliver another interest rate cut, a move widely seen as a tailwind for equities. Yet, a contrarian forecast from Italian bank UniCredit is highlighting a potential divergence between market positioning and central bank action, introducing a note of caution for complacent bulls.
Market-implied odds, as measured by the CME FedWatch Tool, have consistently shown a probability hovering near 90% for a 25-basis-point cut at the Fed's upcoming meeting. This widespread consensus has been a key driver of positive sentiment in stock markets, with investors betting that the central bank will continue its easing cycle to support economic growth.
However, in a notable outlier view, UniCredit has advised its clients to prepare for the possibility of the Fed holding rates steady. In a recent analysis, the bank argued that a rate cut lacks sufficient macroeconomic justification. "UniCredit was the only one of 33 institutions surveyed to predict the Fed would hold," noted a report from ShareCafe, emphasizing the bank's isolated stance against a sea of dovish expectations.
The core of UniCredit's argument rests on the resilience of core inflation and other economic indicators that, in their view, do not signal an urgent need for further monetary stimulus. This perspective suggests the market may be overly aggressive in its rate cut assumptions, creating a vulnerability if the Fed's decision does not align with the prevailing narrative.
The risk is not merely that the Fed holds, but that it delivers what some analysts are calling a “hawkish cut.” This scenario involves the central bank cutting rates as expected but accompanying the decision with firm commentary that signals a pause or end to the easing cycle. Such a move could quickly reverse the positive sentiment that has buoyed markets.
"A rate cut accompanied by unexpectedly firm commentary could trigger a sell-off in stocks, a rise in bond yields, and a stronger U.S. dollar," according to an analysis from Seeking Alpha. This outcome would challenge the valuation of growth-oriented sectors, particularly technology, which are sensitive to changes in the interest rate outlook.
Investors are now parsing every piece of incoming data for clues, but the situation is complicated by the absence of key inflation and employment reports before the Fed's decision-making window. This data-scare environment amplifies uncertainty and places greater emphasis on the Fed's interpretation of the economic landscape.
As the Fed's meeting approaches, the focus will be squarely on Chair Jerome Powell's messaging. While a rate cut remains the base case for the vast majority of market participants, UniCredit's contrarian call serves as a critical reminder of the potential for a central bank surprise that could disrupt a market priced for perfection.