Australian Market Strategist
Summary: As widely expected, the Federal reserve moved to cut policy rates by 25BP last night, but it wasn’t enough for the market, high on the fumes of central bank stimulus, and desperate to hear that rates are going one way only (DOWN!). Fresh off the back of a communication blunder from New York Federal Reserve President John Williams, whose comments had to be clarified by the Fed as academic in nature, the Fed delivered not just on a rate cuts, but another communication mishap.
Powell had one job heading into the presser; to deliver a dovish communique to accompany the dovish statement, but he made a complete mess of this. Instead he stumbled through the press conference delivering a message so clumsy and convoluted he sounded confused himself. To be fair, Powell is drinking from a poisoned chalice, walking a tightrope of expectations but none the less he failed to deliver the clarity the market was searching for. Instead pouring cold water on hopes of a fresh easing cycle, saying the move is a “mid-cycle adjustment to policy”, “not the beginning of a long series of rate cuts” and even flirted with the possibility of raising rates again, “we’ll cut and then we’ll go back to hiking”. And then offset those comments with "I didn't say it's just one" [cut]. Confusing?
These comments just weren’t dovish enough to soothe markets with almost 3 25BP cuts priced by year end. US equities fell across the board, Gold sank, and the USD rallied squeezing shorts. US rates were volatile, with 2yr rates jumping higher flattening the Treasury curve. The yield curve has been telling us that monetary policy is too restrictive, and now with forward guidance not dovish enough the market is interpreting this as a potential policy error, with short end rates too high, therefore raising the risk of recession and pressuring inflation expectations. The bond market does not have faith in Powell's “mid-cycle adjustment”, and nor should they. For one mid-cycle is optimistic (and that’s being polite), and two, US growth is slowing and will continue to do so. It is by no means the Fed’s job to placate markets, but US growth will not hold up whilst Europe and Asia ail, and the manufacturing sector continues to wilt. So, the Fed will be cutting again (25BP in September). This wobble in risk markets will only add to forcing the Feds hand to move again in September, unless the data really rebounds significantly, but the Fed would likely need to see strong evidence of inflation pressure building, and more stable global growth. It is likely only a matter of time until the Fed walk back Powell’s hawkish tone and clarify the messaging that further easing is on the cards. Given that the Fed is responding to uncertainty, an ongoing trade war and a deteriorating global outlook, the yield curve remains inverted and they have no appetite for a persistent disinflationary environment, the case for further easing can still be made.
World trade volumes are declining as exports are falling, industrial production is falling, business investment is being stymied and manufacturing is decelerating, and the problem is not just trade wars, it is weaker global demand driving that story too and a cyclical downturn that pre-dates the trade war. Services and consumption are propping up the expansion so far. The fear is, this permeates through to the services sector and the consumer and you can already see signs of that infiltration in trade sensitive areas like freight and shipping, which are signalling that world trade volumes are set to decline further.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
