Global Macro Strategist
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)
2020-Jan-12
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!
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…
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:
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
