Fork In The Road

CLUB/EDGE client post Monday Sept 16th with Updates Wednesday 18th. Pivotal moment - for risk assets. Here are the key triggers & what's not priced in.

Fed Day!

Calling for an aggressive rate cutting cycle by the Fed since May/June/July/August has been unpopular. But I think the crowd is catching up now.

In fact, central bank rates have been coming down globally as the rate cutting cycle is picking up pace.

• Canada - 0.75% rate cut

• EU - 0.50% rate cut

• Sweden - 0.50% rate cut

• UK - 0.25% rate cut

• China - 0.25% rate cut

• Denmark - 0.25% rate cut

• New Zealand - 0.25% rate cut

Fed is up next, and there is much debate about whether they should cut at all (not my view but many others), let alone the assumed 25bp (a sure thing at this point) ... until the recent surge in betting odds rose to .50 after a Wall Street Journal article from Nick Timiraos hit Friday!

Oh yeah, and non-voting former member Dudley is piling on for 50bp, citing the slowing labor market as risk.

Think about that: Dudley & the “Fed Whisperer” have single-handedly driven a 50bps rate cut Wed from 14% to 61% odds - in 2 days. What gives, Fed?

This is all quite bizarre behavior given the Fed...

• a) Is in blackout mode so these 'leaks' indicate an unknown market risk (read: banks) that could catch investors off-sides.

• b) Doesn't like to surprise markets, but in reality the bond market has already priced in many more cuts so Fed would just be admitting weakness and playing catch-up/down.

• c) Received a letter by three leading Dems this weekend requesting a 75bp cut in order to minimize recession risk, almost as cover to go 50bp before the election Nov 5th.

• d) Does not usually make big policy moves without consensus and Waller and Bowman are not in agreement.

• e) Summary of Economic Projections ("dot plot) are pricing in 1.25% cuts in next three meetings/by year-end and 2.5% by end of 2025, so more than that could challenge the market to doubt Goldilocks.

Geoffrey reminds:

*US FISCAL 2024 YEAR-TO-DATE DEFICIT $1.897 TRLN VS COMPARABLE FISCAL 2023 $1.525 TRLN DEFICIT - US TREASURY.
*US BUDGET GAP SURGES 24% TO $1.9T FOR OCT. THROUGH AUG.
*US AUG BUDGET DEFICIT $380B (CONSENSUS $317.30B DEFICIT) VS AUG 2023 SURPLUS $89B
*US BUDGET GAP CLIMBS AS DEBT INTEREST COSTS SURPASS $1 TRILLION

Look no further for the rate cut reason.

Even Claudia Sahm has chimed in to go "Absolutely 50" given risks to labor market.

And with that remember the growing risks:

"When the labor market breaks, Fed can’t control anything.
They have already lost the plot with falling oil and yields and USDJPY!"
  -   Me

Getting In Front & Fed Day Market Reaction

In a June 20th client post I discussed how the new trend isn’t just that global central banks will devalue their local currency AND cut rates while Fed pauses, but that they are cutting rates because of the falling global credit demand as inflation is falling and real growth is slowing, with the looming risk of higher unemployment and falling incomes reducing consumption.

I also warned that Powell's "data -dependent" Fed mantra pushed at Jackson Hole in August translates into #HigherForLonger eviscerated, less Fed clarity around forward guidance, & higher volatility moving forward - perfect backdrop for further carry trade unwinds.

But for now ... my baseline bet going into Fed day & beyond is this: