Markets are getting excited over a 50bp move again

Friday, 19th July 2019 15:40 - by Shant

It doesn't take much to get the markets excited, and with the FOMC meeting in a week and a half, all the talk is of the potential size of the move which puts 25 basis points at near certainty, while the odds of a 50 basis point move is a little under 50/50.  Last night, NY Fed governor Williams prompted a move up on the odds of a larger cut and was forced to walk back his comments as the financial markets assumed the more dovish stance was in play.  When you consider how current markets can get carried away with it, it seem the market as already boxed the Fed into a corner and needs little encouragement to do more.  

The NY Fed governor laid out the argument that is was better to act preventatively rather than let the economy get mired by the downside risks of which the Fed as a whole has been warning against in recent weeks and months.  Whether through the adverse effects of a trade war, which has seen business investment dwindle, or nearing the natural cyclical peak in the economy, Williams advocated a pre-emptive move which spurred the markets into assuming that the Fed could indeed opt for a 50bp move at the end of the month.  

Another key point that the governer made was that with policy buffer at relatively lower levels than in the past, it would prove more effective to cut ahead of data softening, rather than acting at the time when the economy is meeting the downturn head on.  There is some merit in that view, but what it also suggests is that if the US is indeed headed for a recession, then we could be looking at zero or indeed negative rates in years to come.  This will have clear implications for the bond markets, and the correlation with stocks is something to watch for in the coming weeks.  At the time, the benchmark 10yr Note starting pushing back towards the 2.00% level but managed to hold above here into the North American close.  

Later on in the NY session, the NY Fed chose to qualify the comments made by governor Williams, though while the US Dollar gave back some ground, we saw limited surrender on Wall Street.   

Looking ahead, one thing to consider in this now-familiar dynamic between stocks and Fed policy is that even if we do get the higher 50 basis point cut, there is a strong chance that the Fed will imply that this is a one-off more until more incoming data suggests otherwise.  

Bottom line is that it is all well and good getting excited into the event, but are once again facing the fact that we may have priced all or most of the good news in without considering the aftermath of the FOMC announcement on 31 July.  Just something to consider as the S&P is back above 3000 again.

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.