Citigroup expects the Federal Reserve to cut interest rates by 75 basis points this year. They predict three cuts of 25 basis points each in September, October, and December. This forecast differs from market expectations. Currently, the market anticipates only about 46 basis points of cuts by the end of the year and no reductions during the summer. Citigroup’s view is shaped by the insights from the recent US jobs report. In early 2026, Citigroup expects two more cuts of 25 basis points each. Additionally, they have raised their year-end target for the S&P 500 to 6,300, up from the previous forecast of 5,800. The article highlights the growing gap between Citigroup’s predictions on US interest rates and what traders are pricing in. Citigroup believes rates will start to drop in September, totaling a 75 basis point reduction by year-end. In contrast, futures markets suggest only a modest decline of around 46 basis points by January. This change in outlook follows a strong jobs report from the U.S. While the numbers appear solid, they might indicate a slowdown rather than an overheating economy. Slight declines in wage growth and labor participation could be driving this shift. We’ve seen similar nuances affect rate expectations in the past, where overall strong figures can hide more delicate changes beneath the surface. Moreover, the upward revision of the S&P 500 target supports this forecast. The increase from 5,800 to 6,300 implies confidence in the market and suggests that inflation risks may be easing. This provides the Federal Reserve with space to support economic growth instead of tightening conditions. Looking ahead to early 2026, Citigroup has penciled in two more rate cuts. This would raise the total decline since September 2024 to 125 basis points. If more institutions align with this outlook or if key data corroborates it, futures pricing might adjust accordingly. Until then, the disconnect between these forecasts and market beliefs creates short-term opportunities, especially in forward rate agreements or options on short-term rates. From a strategic perspective, when a major bank outlines a series of rate cuts that contrast with common beliefs—and supports this with higher equity market predictions—it signals confidence in decreasing inflation without triggering volatility. In the coming weeks, pay attention to rate-sensitive instruments like SOFR or Eurodollar futures. Watch for shifts in steepness between late-2024 and mid-2026 contracts. If others begin to embrace the idea of earlier policy changes, it could lead to realignment. This focuses on timing rather than direction, where convexity-based products may offer better entry points. Even as various macro indicators like CPI, core PCE, and initial claims data emerge, the key task is to compare expectations with actual pricing. It is this gap that presents clear opportunities, especially if one thinks that final policy levels will stabilize lower—and sooner—than what most anticipate.

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