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.

 

Scenario	Probability	Assessment
Slightly Hawkish Hold	15%	Powell reiterates they remain data dependent at each mtg. Too early to gauge the impact of lower shelter CPI and jobs data have not slowed enough to warrant locking in a Sept. cut Market Impact: Sell-off in assets, Dollar gives Yen a headache
Neutral Hold	25%	Statement has negligible changes, Powell sounds neutral Market Impact: With a lot of cuts priced-in, mixed reaction
Base-Case: Dovish Hold	50%	Statement to be rewritten to point out weakening consumer and slower job growth can risk exacerbating downside ahead They will also mention that recent inflation prints have given the FOMC confidence to start the rate normalization process Powell should mention the turn in data nullifies the June dots But no cut in July as Powell said initial cut is an important first move and cutting now would suggest they know something. However Powell indicates all options open, even a -50bp later Market Impact: Steepener to work as 2s will break resistance
Surprise 25bp Rate Cut	10%	A surprise cut goes against being transparent, creates vol and it goes a step further than just “removing restrictive policy.” Yet given the latest weakening data trends, they might want to go early since there are about 8 weeks to the Sept FOMC. In our view they’d like to go every other meeting (at first) in this easing cycle. Cutting early means Sept cut is off the table Market Impact: Risk-on in all assets at first, but it falls short of a new high for stocks = BTD in STIRs, sell stocks on the pop

 

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