Summary: Net, post NFP sell-off, we expect markets to react to the hawkish move up in the dots initially but anticipate an overall neutral outcome later because markets are expecting higher dots and we also do not see Powell sounding hawkish at the presser either.
|
Scenario |
Probability |
Assessment |
|
Hawkish Hold |
10% |
|
|
Base-Case: Neutral Hold |
50% |
|
|
Dovish Hold |
30% |
|
|
Very Dovish Hold |
10% |
|
Future Rate Cut & QT Scenarios for the Balance of 2024
US Macro View: The higher rate burden, 1st on the federal gov’t (that's driving fiscal-based growth which needs lower rates to function) and 2nd on non-wealthy households, small businesses and 3rd its hitting CRE/Bank balance-sheets, will result in a further material weakening of macro conditions.
Fed Rates View: We maintain our view that the Fed Funds rate is at least 100 to 150bps too high, where the Fed needs to feel through the dark to determine neutral (in our view it isn’t 5.4%). We have been of the view they should cut in July, but after May’s NFP report, the 1st cut comes down to if the Fed is as equally concerned as us about the divergence displayed in the jobs data. Cutting sooner allows them to gauge data in the summer too and avoid the 1st cut so close to the election. Net, we’ve shifted our scenario probs and outcomes below and will reassess post FOMC.
Fed B/S View: We believe the Fed wants to keep QT until reserves in the banking system get to 8-10% of GDP. Even if they cut rates (as we expect later) that won’t preclude them from continuing QT (esp. if cuts do not bring rates sub neutral - i.e. 3%). We think the 2nd step in the QT taper process is to change the balance-sheet (b/s) composition. Later we expect them to use MBS & UST proceeds toward short-term USTs as auction add-ons. Even further ahead, we see the b/s growing again too.
Please see the link above for the PDF with macro and market charts and scenarios table…
