Macro
The Fed delivered on our out of consensus call for a 50bp cut to kick off the easing cycle in September, but why start with jumbo cuts? Well, in our view the Fed should have cut earlier in the year to be more preemptive, but they needed to see proof that inflation was well on its way to 2%. However, while waiting for that confirmation, the cracks in the economy have become visible enough that the weaker data trends can no longer be ignored. Our take has been that the Fed remained too restrictive for too long—thus, it will get even bumpier from here, even while the Fed pulls out all of the stops.
Furthermore, the idea of a “no landing” scenario—a reacceleration of growth while keeping rates historically high (without cuts as some were suggesting) was always going to be wishful thinking. We’ve faded that idea but also highlight that soft landings are rare, especially the longer we wait at “higher for longer” rates. In recent soft-landing outcomes (especially the much sought-after 1995 experience), conditions were vastly different versus now.
In prior soft-landings, the Fed didn’t keep rates high for longer than one year (with the yield curve inverted no less), nor was the banking system so risk averse and almost contracting for years (via QT, reduced market value of bond portfolios, and less credit growth). And in the other soft landings, the unemployment rate was stable or declining as the Fed adjusted rates, compared to the current period of a rising unemployment rate.
It is for these reasons and many other observations on the macro landscape that has us more in the bumpy landing camp (where we have kept our recession risk probabilities high until the Fed gets rates closer to neutral).
Markets
From this point forward, market participants and policymakers will be data dependent. It will get even more challenging to map out the coming months, as a lot has been priced in to the rates market—money market forwards suggest a smooth path for Fed easing towards ~3%, wrapped up in one year. Either we get a quicker decline towards neutral or data evolves in a way that will drag out the adjustment. Either way it will impact broader market pricing.
Special Topic
With the US election event weeks away, we narrow down possible electoral outcomes and how they may impact Fed policy, the economy and markets post November. We also review prior market price action (in rates, stocks, the dollar, credit and equities) into and out of prior presidential elections. The key for outsized moves in either direction comes down to the element of how much of a surprise it was versus prevailing polls before the final results.
Please see the PDF report link above for the full write-up with charts and forecasts…
