U.S. Desk Strategy Market Views

Summary:

With economic data surprising to the downside for months (and become glaringly more of a concern for markets and ex-policymakers), our base-case is for a dovish FOMC hold outcome.

The statement needs a major re-writing to point out the weakening consumer and slower job growth, both of which run the risk of exacerbating downside to the overall macro environment. In our view, the Fed should also indicate that the trend lower in inflation has now given them confidence to start the rates normalization process soon (signaling an initial cut in September).

However, we believe every meeting is live and we are of the view that the sooner the Fed cuts the less they will need to do (and going sooner increases the odds of a soft-landing). Although sentiment has come around to our view that there are cracks on the data front, we argue a surprise cut at the July FOMC meeting would go against being transparent. The Fed wants to ease into “easing” and waiting until September gives them time to assess the macro landscape.

In our view, a July cut would be a step further than just “removing restrictive policy” as it would suggest they know something we don’t, creating unneeded vol. Hence, we stick to our revised call.

In terms of market impact, nearly every recent FOMC meeting has been met with a rates rally, so perhaps we are due for a sell-off if the Fed sounds neutral or comes across as slightly hawkish. However, if the Fed is as dovish as we anticipate, 2s will break resistance to lower yields and we continue to advocate adding to steepeners here.

Please see the link above for the PDF with macro and market charts and scenarios table…