MACRO 6 minutes to read

FOMC, the day after...

Kay Van-Petersen

Global Macro Strategist, Saxo Bank Group

Summary:  Saxo Head of APAC macro strategy Kay Van-Petersen reflects on yesterday's pivotal FOMC meeting and how it has set the stage for a shift in trading conditions across a broad sweep of financial assets.


I’ve been speaking to a lot of clients, peers, friends, frenemies and other Macro Padawans this morning in Asia. I have to be honest, I was a bit struck by how… relaxed folks seem to be on the Federal Open Market Committee overnight. With comments such as ”boring”, “nothing to do here”, etc. Now granted sometimes that is just positioning speaking because folks have been struggling on conviction – which to be fair… it been a tough few years in global macro… not just a tough few months. 

So I thought I would just reiterate a few of my current top-of-mind thoughts – for better or worse. I have also attached the latest Fed statement, a comparison sheet between the June & May statements, as well as a link to the press conference. 

So, a few points:

The consensus “view” (including my own) going into the FOMC was that the market was expecting way too much dovishness and that seems to have been the trend pretty much from the back end of Q4-2018 to today. Yet as a savvy macro trader I know – let’s call him Stratos – said, despite expectations, the Fed always seems to deliver to the market… even if it’s maybe not its intention.

Whilst the Fed kept rates unchanged, the tweak in wording (including taking out “patient”) and most notably (to me at least), the abstaining from a collective agreement – with Bullard advocating a 25 basis point cut – suggest that the likelihood of what could be a Fed cutting cycle will kick off at the next meeting on Jul 31 (Asia Aug 1, at 2am SGT/HKT/CST)

Note even though this video from John Hardy was a preview to yesterday’s FOMC, it still does a brilliant job of thinking about possible scenarios for the next Jul 31 Fed meeting. 

The two big levers that the hawks and bearish oriented tribes have are: 

 Current level of elevated equity markets, we lifted +30bp o/n to close at 2927 on SPX cash (not  far from ATH of 2954)

 The chance of some kind of US/China deal being struck before the Fed July meeting. The delta of this was quite low just 48 hours ago – yet since then, we’ve seen Trump tweeting that him and Xi are back to best pals status. And both teams are back at it. As low a probability of a ‘real deal’ being made is… it’s worth bearing in mind, that Trump is the master of spin (while I think his whole 2020 election strategy is on tariffs, trade wars and potential conflicts in the Middle East), and he could window dress any kind of agreement. If there is one thing Trump has proved time and time again, is there is literally no accountability and transparency surrounding politicians and policymakers.

Currently the market is pricing the Fed July meeting at 100%, soon the conversation will be about whether it could be a 50 bps cut of a 75 bps cut.

Love it or hate it, note some of the key big-time structural breaks we are seeing on a cross asset basis:


 This morning Asia US10s got sub 2.00% to 1.9719 & US 30-yr bonds got to 2.4782. Remember the Fed is at 2.50%

Whilst tactically we could see and should see some position liquidation and profit taking that could push yield back…

…structurally the bar for a big move back higher in yields seems to be bigger and bigger (i.e. need huge pickup in growth and inflation from the likes of the US and China). We are likely going to be making ATL levels on yields… across ALL MAJOR sovereign bond markets… you thought 2016 was crazy… just wait… and that’s with US10s at these 2.50% levels, Bunds at -30 bps and JGBs at -17bp

In Australia we have gone from +2% on both 5s and 10s at the start of the year… to 10yr Aussie bonds yielding 1.295% now. And this is before the inevitable recession that will come, after close to three decades… I can see a pathway where Aussie 10s will need to get sub 25-50bp before all this is over… 

 Gold is on fire and breaking out higher (awesome call by our CIO and Chief Economist Jakobsen), we are at $1,380 which is above that $1,350 level that has been crucial resistance (a close above $1,350 on the weekly should open us up for the $1,400/$1,500 levels). Again, historically speaking the precious metals miners are some of the few sectors trading at multi-year low valuations relative to the markets [ETFs such as GDX, GDXJ, SIL)

 Dollar/yen is sub 108.00 at 107.67 down -40bp… the Bank of Japan does not have an answer for an easing Fed… and whilst Japan will almost certainly not take up the Sales Tax issue in October, the convexity on USDJPY crosses still feels like 105 is higher probability than say 109.50… and even 103 & 100 cannot be ruled out on a 6-12m horizon (think of US election scenario where Trump is going to lose and Enron accounting maths from the likes of Bernie or Warren come into play… )

 US equities and equities in general are liking all this, salivating at the “race to the bottom theme” (seen Draghi, Trump and Lowe comment on all this, in the last 24hrs) and betting that the lower yields go, the more justification for owning equities – and you know what? So far that has worked in this cycle.

 Remember it’s not about being right or wrong… it’s about consistently making money over time. There are always profitable opportunities out there, times to stay on the side, times to stick to core positions and times to be tactical… I’m looking at the divergent trends that will occur regardless of US/China (i.e. Australia downside, Norway upside, EM demographics, global healthcare spend, single stock macro like plays such as BYND, etc).

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

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)