Said Brainerd and Williams and Jay
A rate cut is soon on the way
And growth’s convalescent
So easing will help save the day
We have learned a great deal this week about central bank sentiment from the Fed, the ECB, the BOE, Sweden’s Riksbank as well as several emerging market central banks like Mexico and Serbia. And the tone of all the commentary is one way; easier policy is coming soon to a central bank near you.
Let’s take a look at the Fed scorecard to start. Here is a list of the FOMC membership, voting members first:
Chairman Jerome Powell – cut
Vice-Chair Richard Clarida – cut
Lael Brainerd – cut
Randal Quarles – cut
Michelle Bowman – ?
NY – John Williams -cut
St Louis James Bullard – cut
Chicago – Charles Evans – cut
KC – Esther George – stay
Boston – Eric Rosengren – cut
Philadelphia – Patrick Harker – cut
Dallas – Robert Kaplan – ?
Minneapolis – Neel Kashkari – cut 50!
Cleveland – Loretta Mester – stay
Atlanta – Rafael Bostic – stay
Richmond – Thomas Barkin – stay
While we have not yet heard from the newest Governor, Michelle Bowman, it would be unprecedented for a new governor to dissent so early in their tenure. In the end, based on what we have heard publicly from voting members, only Esther George might dissent to call for rates to remain on hold, but it is clear that at least a 25bp cut is coming at the end of the month. The futures market has priced it in fully, and now the question is will they cut 50. At this point, it doesn’t seem that likely to me, but there are still two weeks before the meeting, so plenty can happen in the interim.
But it’s not just the Fed. The ECB Minutes were released yesterday, and the telling line was there was “broad agreement” that the ECB should “be ready and prepared to ease the monetary policy stance further by adjusting all of its instruments.” It seems pretty clear to me (and arguably the entire market) that they are about to ease policy. There are many analysts who believe the ECB will wait until their September meeting, when they produce new growth and inflation forecasts, but a growing number of analysts who believe that they will cut later this month. After all, if the Fed is about to cut based on weakening global growth, why would the ECB wait?
And there were the Minutes from Sweden’s Riksbank, which were released this morning and showed that their plans for raising rates as early as September have now been called into question by a number of the members, as slowing global growth and ongoing trade uncertainties weigh on sentiment. While Sweden’s economy has performed better than the Eurozone at large, it will be extremely difficult for the Riksbank to tighten policy while the ECB is easing without a significant adjustment to the krona. And given Sweden’s status as an open economy with significant trade flows, they cannot afford for the krona to strengthen too much.
Meanwhile, Banco de Mexico Minutes showed a split in the vote to maintain rates on hold at 8.25% last month, with two voters now looking for a cut. While inflation remains higher than target, again, the issue is how long can they maintain current policy rates in the face of cuts by the Fed. Look for rate cuts there by autumn. And finally, little Serbia didn’t wait, cutting 25bp this morning as growth there is beginning to slow, and recognizing that imminent action by the ECB would need to be addressed anyway.
In fairness, the macroeconomic backdrop for all this activity is not all that marvelous. For example, just like South Korea reported last week, Singapore reported Q2 GDP growth as negative, -3.4% annualized, a much worse than expected outcome and a potential harbinger of the future for larger economies. Singapore’s economy is hugely dependent on trade flows, so given the ongoing US-China trade issues, this ought not be a surprise, but the magnitude of the decline was significant. Speaking of China, their trade data, released last night, showed slowing exports (-1.3%) and imports (-7.3%), with the result a much larger than expected trade surplus of $51B. Additionally, we saw weaker than expected Loan growth and slowing M2 Money Supply growth, both of which point to slower economic activity going forward. Yesterday’s other important economic data point was US CPI, where core surprised at 2.1%, a tick higher than expected. However, the overwhelming evidence that the Fed is going to cut rates has rendered that point moot for now. We will need to see that number move much higher, and much faster, to change any opinions there.
The market impact of all this has generally been as expected. Equity prices, at least in the US, continue to climb as investors cling tightly to the idea that lower interest rates equal higher stock prices. All three indices closed at new records and futures are pointing higher across the board. The dollar, too, has been under pressure, as would be expected given the view that the Fed is going to enter an easing cycle. Of course, while the recent trend for the dollar has been down, the slope of the line is not very steep. Consider that the euro is only about 1% above its recent cyclical lows from late April, and still well below the levels seen at the end of June. So while the dollar has weakened a bit, it is quite easy to make the case it remains within a trading range. In fact, as I mentioned yesterday, if all central banks are cutting rates simultaneously, the impact on the currency market should be quite limited, as the relative rate stance won’t change.
Finally, a quick word about Treasury bonds as well as German bunds. Both of these markets were hugely overbought by the end of last week, as investors and speculators jumped on the idea of lower rates coming soon. And so, it should be no surprise that both of these markets have seen yields back up a decent amount as those trades are unwound. This morning we see 10-year yields at 2.13% in the US and -0.21% in Germany, well off the lows of last week. However, this trade is entirely technical and at some point, when these positions are gone, look for yields on both securities to head lower again.
This morning brings just PPI (exp 1.6%, 2.2% core) which is unlikely to have much impact on anything. With no more Fed speakers to add to the mix, I expect that we will continue to see equities rally, and that the dollar, while it may remain soft, is unlikely to move too far in any direction.
Good luck and good weekend