U.S. Desk Strategy Market Views

Post the MacroMania

• The super-macro week of late July/early August led to a volatile adjustment in pricing and positioning. As the dust settles, we remain vigilant and unconvinced that the coast is clear. The markets were not just reacting to a specific macro event, but a culmination of factors (re-thinking of central bank policy divergence and acknowledgement that the jobs data narrative has turned), as well as highlighting how thin market functioning is at limits. What if this was a larger (sustained) shock, the vol could be debilitating and counterproductive.
• We’ve said no to the “no landing” narrative, we didn’t go soft on the “soft landing”, and our thesis remains that a “bumpy landing” can turn into a hard landing if the Fed drags out the easing cycle. This time isn’t different, the longer they wait, the more they will need to cut. That said, if the Fed delivers major cuts, it’s possible they can foam the runway (lessen the impact) on consumer spending, small business financing, and avoid causing damage to jobs.
• We subscribe to the view monetary policy works with “long & variable” lags (delayed by fiscal stimulus) and that “rates matter” in a highly levered economy. The rate channels have shifted from housing/Corporate America (although some areas within these sectors could weaken if the Fed doesn’t cut soon) to the marginal consumer (those impacted by auto loans, student debt & credit cards) and small businesses that are feeling the rates pinch.

 

MUFG Historical Fed Views: Up until recently, given our macro views, we have been more dovish than the market and most other forecasters. In Q1, we were perhaps too dovish and early (and thus wrong in the 1st half) as we were forecasting more than 5 cuts in 2024. We than pushed back our 2024 expectations in Q2 to a minimum of 3 cuts after nonstop hawkish Fed speaker pushback.

MUFG Current Fed Views: In light of recent developments, we expect the first Fed cut to be 50bp. The questions are when do they start cutting, how deep does the Fed go (above, at, or through neutral of roughly 2.75%) and when will they attenuate the pace to “only” 25bp cuts? Given the election and October NFP birth/death bias on 11/1, we are between Scenario 1 or 2. We still think the Fed could pause once Fed Funds is at 4%, but they eventually could go down to 3%. In essence, we believe they should go sooner and faster versus waiting and running the risk of doing more later.

Intra-Meeting Cut Views: We assign a low probability of an intra-meeting Fed cut. As the enclosed analysis demonstrates, intra-meeting cuts are rare and have only happened when there is an acute market functioning issue, a major decline in stocks (greater than 10%), or an exogenous shock.

 

*Current Fed Funds Midpoint is 5.375%	Scenario 1	Scenario 2	Scenario 3	Scenario 4	Scenario 5 (Wildcard)
Intra-meeting (Jackson Hole or Post NFP)					Double Cut
Wednesday, September 18, 2024	Double Cut	Double Cut	Cut	Double Cut	Double Cut
Thursday, November 7 (After US Election)	Double Cut	Cut	Cut	Double Cut	Cut
Wednesday, December 18	Cut	Cut	Cut	Double Cut	Cut
Total Number of 25bp Cuts in 2024	5	4	3	6	6
Year-End Fed Funds Rate	4.125	4.375	4.625	3.875	3.875
MUFG Probabilities	40%	30%	10%	15%	5%