Following on from yesterday’s ECB meeting where, as expected, a rate cut was pushed out to their September meeting, focus will now be on the Fed meeting next week.
We expect a 25bp cut on the 31st July with a slightly hawkish shift in language as this will be the first rate cut since the Global Financial Crisis. This will be taken as a ‘Fairly neutral’ cut leaving the door open for further cuts should the outlook not improve or the obvious downside risks remain in place from the trade frictions etc. This should result in minor market moves, a move up in the curve with a flattening bias and some risk asset disappointment.
If they cut 25bp and make comments such as ‘this is taking back the December cut and will now move to data dependency’ this will be taken as a rather ‘Hawkish’ cut. We would expect a bear flattening of the curve with some risk asset weakness and US dollar strength.
A ‘Dovish’ cut will be one where the Fed will be locked into a further September cut through their comments regardless of whether there is an improvement in data or positive developments on key risks such as trade. We would expect a steeper curve as short rates drop, to price in further cuts through this year and early next year, with risk assets improving and some US dollar weakness.
Indeed many countries across the globe are showing signs of fatigue with the growth outlook certainly not improving at this juncture, something the Fed members referred to before entering the blackout period last weekend.
While a 50bp cut is not our central case it should not be ruled out and probably warrants a 20% to 30% weighting. Any move of that magnitude will cause a further steepening of the yield curve and should see risk assets rally firmly with a weaker US dollar.
We shall see, good luck.