Head of Macroeconomic Research
Summary: The only interest of the upcoming FOMC meeting will be the release of the latest Summary of Economic Projections, including the evolution of dot plot.
The upcoming FOMC meeting is unlikely to be a game-changer. Chairman Powell has been very consistent over the past months regarding the short-term evolution of monetary policy. We expect rates to stay on hold, like everyone else in the market.
The recent macroeconomic data reinforces our view that the Fed will hold. November payrolls came out strong at 266,000 (10-month high) and the 3-month moving average payrolls was at 205,000. Though some of the increase was due to auto workers returning from a strike at General Motors, the labor market data confirms the US economy is still in very good shape. The only recent weak spots in terms of job creations – thought not worrying - are in retail trade and leisure & hospitality. Overall, we think US growth will move towards 1.6% next year, that inflation will be contained and the unemployment will stay below 4%. Not bad considering the economy is at the end of the cycle.
The only interest of the FOMC meeting will be the release of the latest Summary of Economic Projections, including the evolution of dot plot. We forecast that the median dot plot will move slightly lower in order to validate the monetary policy pause.
The likelihood of a rate cut during H1 2020 remains high considering risks related to the trade war, persistent China’s slowdown and concerns over financial risks such as CLO.
2019 Quantitative Tightening has been erased in less than three months. We are still puzzled about what is really happening in the US repo market. As pointed out by the BIS, hedge funds have certainly exacerbated the current turmoil, but the key problem is related to lack of trust between banks to lend cash. We will probably know more about funding issues on Thursday, as the Fed is expected to announce its 2020 calendar offerings. In our view, “Not QE” is likely to last longer than most expect.
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
