September FOMC outlook: The Fed is caught between conflicting forces
Head of Macro Analysis
Summary: Our expectations for the upcoming FOMC meeting.
- A rate cut is a done-deal and has already been priced in by the market. Based on futures from the CME Group, the probably of a 25bps rate cut is at 82% and a status quo on rate is at 18%. Historically, the Fed has always gone with whatever over 61% of the market forecast.
- The motivation for the Fed to lower rates will be mostly linked to external factors, e.g. trade war and more importantly tightened financial conditions at the global level due to US shortage. On this last point, we think it’s going to get worse (in the fall) before it gets better (in early 2020). USD funding problems are doomed to increase in coming weeks term due to the expected ramp up of USD treasury bill issuance following the compromise over the debt ceiling in past August. We should be ready for higher FRA-OIS spreads in September/October.
- The market is not prepared to a hawkish cut. Over the past few weeks, future expectations of further cuts have receded due to positive US data, notably extremely strong core CPI and very solid retail sales for two months in a row. The Fed is in a very tricky situation as it is caught between two conflicting forces: positive domestic data and higher external headwinds. The central bank could prefer to remain careful regarding the macroeconomic outlook and opens the door to a pause, which would also have for advantage to reiterate the independence of the Fed from the White House.
- What makes us nervous is the macroeconomic impact of Saudi oil disruptions on growth and inflation if it is prolonged more than a few weeks. We don’t think that it will weight much on the Fed monetary policy in the short term but, if disruptions last longer than we all expect, it could constitute a true game-changer. We have already observed a strong jump in inflation breakeven following Sunday’s events.
- Strategic view: Given various risks that may emerge in coming weeks (Brexit, growth slowdown and US tariffs against Europe following the US victory in Airbus case) and the problem of dollar shortage, the broad USD index is likely to follow an upward trend in the medium term. Historically, period of USD shortage always had positive implications for DXY and negative implications for risk appetite.
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Central banks' attempts to kill inflation is a paradigm shift, which could end in a deep recession.
Tangible assets and profitable growth are the winnersWith US equities officially in a bear market, the big question is where and when is the bottom in the current drawdown?
Understanding the lack of investment appetite among oil majorsThe everything rally seen in recent quarters has become more uneven, as its strength is driven by commodities in short supply.
The pressure is on as the wind leaves the sailsWith cryptocurrencies in sharp decline, are we entering a crypto winter or is the bear market a healthy clean-up of the crypto space?
Why the Fed can never catch up and what turns the US dollar lower?Many other central banks are set to eventually outpace the Fed in hiking rates, taking their real interest rates to levels higher than the Fed will achieve.
Bank of Japan: Swimming against the tideThe Japanese economy has gone from the age of deflation to rapidly rising prices in no time, leaving the Bank of Japan in a pickle.
Green transformation detour and bear market hibernationWith the impending risk of global econonomic derailment, we share the five things investors need to consider in this new half year.
Crisis redux for the eurozone?Whether there's going to be a recession in Europe or not, the path towards a stable economy will be agonizing.
Technical Outlook: Gold, Oil and a remarkable multi-decade perspective on EquitiesThe Nasdaq bubble pattern, USDJPY resistance, crude oil uptrend losing steam and the technical outlook for USD.
China: the train of new development paradigm left the station two years agoChina is transiting to a new development paradigm, as they are hit by deteriorating terms of trade, a slower global economy and an uncertain future while continuing attempts to contain the pandemic.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)