Following the latest US Federal Reserve meeting, Mutual Limited’s CIO Scott Rundell looks at how markets have reacted and the outlook.
Fed says easy tiger, we’ll get there…be patient…
It was all about what the Fed said and what they didn’t say last night at and post its policy meeting. The board confirmed peak policy settings and removed hawkish language from the statement, taking a somewhat more dovish stance.
The long and the short of it is rate cuts are close, but the board needs more confidence that data will continue to head in the right direction at the right pace before they formally pull the trigger and cut rates.
Powell said reducing policy restraint too soon, or by too much, could upend progress to date and reignite inflation, in turn requiring even tighter policy to get inflation (currently running at +3.4% YoY) back to target (+2.0% YoY).
Stock investors threw their toys out of the cot following the meeting. Stocks were priced for the emergence of “imminent rate cut” language, but the apparent willingness to hold rates at current levels for longer if appropriate comments left a sour taste in mouths.
Bonds rallied strongly on the headline outcome and statement but lost some steam as the press conference unfolded.
As for when the Fed will likely cut, markets are pricing a March rate cut at 43%, or 11 bps, on the table per se, but not a slam dunk either. May is looking more probable at 85%, with a second cut in June.
Markets are still pricing in ~140 bps of rate cuts by year end, taking the Fed Funds Rate down to 3.94% (from 5.35%)
Also read: Fear-of-the-Fed Turns to FIFOMO
Bonds commentary
Lower-than-expected CPI print saw markets price in RBA rate cuts sooner than previously the case, August for the first cut vs September previously, plus a second rate cut in December (not previously in the mix).
Markets now have the cash rate at 3.71% by the end of December (-64 bps). ACGB’s were already in the green (yields lower) on offshore leads, but gains extended further post the CPI print.
We expect the RBA will remain on hold next week and they’ll be cautious on any plans to loosen policy settings in the immediate future. We’re also dubious around the likelihood of a second cut this year, which is now priced in.
Next week’s meeting / statement will likely come with still an element of hawkishness, but also recognition that further rate hikes are formally off the table. US treasuries rallied last night following the Fed meeting, with 2Y yields initially -15 bps lower, however as the presser progressed, some of the euphoria dissipated, now -11 bps lower as I type.
Similar moves in 10Y, -9 bps initially, now -6 bps. Given these leads, ACGB’s are set for a good day and futures are suggesting such.
