FAST FIVE: If Powell Is Serious About No More Cuts In 2019, "Expect A Forceful Campaign" To Convince Investors
If Powell Is Serious About No More Cuts In 2019, “Expect A Forceful Campaign” To Convince Investors Commenting on yesterday's FOMC announcement, BMO's Jon Hill points out that whereas the dot plot suggests the Fed is now down cutting for 2019, “consensus remains a 1990s-style 75 bp of aggregate easing followed by an on-hold period to assess the impact of the recent moves.” And while the dot plot showed a dramatic schism within the FOMC, with 7 members expecting more rate cuts, while 10 happy with rates either where they are or higher, “in its own way, the Fed has tacitly endorsed this assumption by not shifting to a data-dependent stance this week.” To be sure, as Hill notes, “it was a formidable communications challenge and given the muted market response to yesterday's events, Powell can chalk this one up to a win; or at least a non-loss.” Furthermore, it's not as if the dot plot is indicative of anything: back in June, the Fed's Summary of Economic Projections did not expect any rates cuts for 2019; three months later it had already delivered two.
As such, according to the BMO strategist, “In the event a final 25 bp cut isn't the default position of core Committee members, then a campaign to dissuade investors from this assumption will begin in earnest.” To be sure, one look at the Fed Funds market shows that while the odds of a December 2019 cut are still well above 50%, they are shrinking fast, with the probability of not change up to 30%.
This dynamic according to Hill, is not new, although it is one which will come back into focus as the competing global 'uncertainties' meet the reality of firming domestic data.
In short, the Treasury selling – which we believe was largely a by-product of the record IG issuance at the start of the month as a result of some $100BN in rate locks – has now ended, alongside the scramble to refi investment grade corporate debt.
Well, then according to Hill, “even an attempt to reach 2.25-2.50% 10s at this point in the policy and economic cycle would presumably be short-lived and met by a round of dip-buying interest from a variety of different investor bases.” In short, buy the dip.