Fed cut is signed, sealed and awaiting delivery

Powell gives in to the market despite positive data flow. No big trend on the fx front.
Philip Wee, Eugene Leow11 Jul 2019
    Photo credit: AFP Photo


    Rates: Powell gives in to the market despite positive data flow

    Fed chair Powell just about signed and sealed an imminent Fed cut at the semiannual monetary policy report overnight. The first Fed cut in a decade is likely within this quarter and could come as soon as end-July. Short-term USD rates undid most of the selloff that followed from the firm payrolls last week with the market assigning 24% odds of a 50bps cut and a 76% chance of a 25bps cut by the end of the month. Insurance cuts should amount to a cumulative 50-75bps over the coming year and this scenario is already reflected in the markets.

    With such strong hints of imminent Fed easing, we think that central banks across the world will take the cue. In Europe, ECB president Draghi has already opened the door to rate cuts and quantitative easing. Further details and dovish narrative could well come at the policy meeting on 25th July. Risks of the European Central Bank (ECB) trying to outdove the Fed should not be underestimated. This could have the effect of dampening interest rates across the EM (including Asia) space. Odds of the Bank of Korea (BoK) and Bank Indonesia (BI) easing next week have ticked up.

    In Singapore, all eyes will be on the advance GDP estimates tomorrow. High frequency data have been weak and there has been increasing speculation that the Monetary Authority of Singapore (MAS) would ease by October. For SGD rates, any uptick arising from slope flattening should prove transitory. Fed cuts would be the overwhelming factor driving short-term SGD rates lower.

    FX: No strong trend biases after Powell’s testimony

    Fed Chairman Jerome Powell affirmed that the Fed is leaning towards rate cuts that insure the US economy against global headwinds and not the start of an easing cycle to battle a potential recession. While the market has discounted a cut at the next FOMC meeting on July 30-31, the timing of subsequent cuts will depend on incoming US data and financial conditions. On the latter, signals remain mixed – record high US stock indices vs most of the US bond yield curve below the Fed Funds Rate. On US data, last Friday’s better-than-expected nonfarm payrolls will not be enough to offset the trade-related headwinds in negative YoY growth in factory and durable goods orders, as well as new orders in the ISM manufacturing and sub-manufacturing indices.

    Historically, the Fed had delivered two rounds of insurance cuts, each totalling 75 bps, in 1995-96 and 1998. The USD Index (DXY) behaved differently in both experiences. The DXY appreciated in 1995 when the US started its strong USD policy. DXY depreciated in 1998 at the end of the Asian financial crisis into a tech-led recovery similar to 2017. Today, US President Trump’s trade protectionist policies have weakened the global economy amidst accusations of currency manipulation by China and other major trading partners who are also looking to provide stimulus. In the short-term, the tendency remains for currencies to range trade.

    Philip Wee

    FX Strategist - G3 & Asia

    Eugene Leow

    Rates Strategist - G3 & Asia

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