Macro Dragon: 2020 is Half-life for the Fed... Likely 1 cut by 1H20 (Special Sun Edition)
Global Macro Strategist, Saxo Bank Group
Summary: Macro Dragon = Daily Cross-Asset Global Views
In this Macro Dragon, KVP touches on what he feels is one of the most important points in 2020 - the fact that if the Fed has to do anything, its more than likely to be in the 1H of the year given the elections. Plus, KVP thinks there is likely at least one 25bp cut by E-1H (likely 10 Jun 20)
Macro Dragon: 2020 is Half-life for the Fed... Likely 1 cut by 1H20
Before we get into it, for those that are back – or on the way back in – from what was hopefully a restful year-end holiday break, Happy New Years!
Let me sincerely (hand on liver) wish you, your families & teams the best of 2020. May your health, vigor & experiences be excellent & full of fun + laughter. May you continue to grow & develop yourself. May you be awash in gratitude & contribution plus fall [tail] backward into more money than Bezos.
We’ll be shaking things up from KVP’s side, so expect a lot more trade views going forward, as well as 20 long-term trades views for 2020 – which KVP will do a special piece & mini-series on.
Ok let’s get after it…
On the Fed…2020 is a half-life
Listen closely KVP will say this… only about 8 more times – given we have 8 scheduled Fed meetings this year…
To start off as a summary there were 3 cuts last year taking us from 2.25-2.50 to the current 1.50-1.75, this post 5yrs that saw 9 hikes (+1x in Dec 2015, +1x in Dec 2016, +3x in 2017 & +4x in 2018).
As discussed with some of our VIP clients, KVP’s view is that for 2020 the Fed has a half-life.
If they are going to make any rate decision, it is likely going to be prudent for them to move in the first 6m of the year – given that 2nd half will be all around US elections.
They would not want to get caught up in playing favorites one way or another – whether or not they explicitly state this is beside the point, this is human nature plus saving potential embarrassment & stress (path of least resistance). Obviously with US elections being on Nov 3 – the Fed could still do something on the Nov 5 & Dec 16 meetings.
Currently KVP is a touch skeptical on the consensus 1H economic bounce, we’ll know once we are through 1Q20 whether or not globally it’s a symmetrical real bounce or not – yet think we most likely see at least one cut from the Fed in 1H20.
That would likely at the min. come on Apr 29 (yet more likely Jun 10) as that would have given us 6 full months since the last cut on 30 Oct 19 & 9 months since their first cut on 31 Jul 19 – i.e. rationale being here, that would have given them enough time to see whether or not their cuts were having the desired effect. Or to put it differently, they would have paused for enough time to really gauge whether further cuts are warranted.
Obvious risk to this, is if consensus is spot on - & note consensus tends to be right overtime, the contrarian inflection points are actually really few & far between… they are just sexier to talk about & be about… “I am going against the crowd” good luck! The vast majority of the time the crowd wins… there are likely more dead contrarian trade views than there are people who have ever lived on the planet – then we get a big bounce, including in China's economy, that leads the Fed to be comfortable on sitting on the sidelines.
And obvious risk to them cutting earlier are worse than expected deceleration from the US economy.
No doubt if we do get a Phase One Deal Break-off in 1Q/2Q this year, folks will re-calibrate the Fed’s potential pathway.
Before we lay out the meetings of the Fed, its worth noting one thing that is definitely not consensus – and that is a hawkish Fed for 2020 & for global central banks in general.
Federal Reserve 2020 Schedule Rate Decision Dates:
- Jan 29 KVP: Likely to be “yawn” will be about press conference & minutes, yet key risk if they indicate bringing down liquidity
- Mar 18 + Potential Forecasts Updates + KVP: could start to see some dovish delta
- Apr 29 KVP: this marks +6m from last cut & +9m from first cut in 2019
- Jun 10 + Potential Forecasts Updates + KVP: likely at least 1 cut in 1H20, just to be safe
- Jul 29 KVP: Fed on Sidelines given US Elections
- Sep 16 + Potential Forecasts Updates + KVP: Fed on Sidelines given US Elections
- Nov 5 KVP: This will be 2 days post the election, again Fed likely sidelined
- Dec 16 + Potential Forecasts Updates + KVP: Fed could get final tweak on the year
What We Are Reading From SaxoStrats:
- Jakobsen & SaxoStrats team with our sensational 2020: Outrageous Predictions
- Hardy latest FX Update: USDJPY to test above 110 if US yields continue to climb & USD bullish reversals abound
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