The Daily Update - Somewhat reluctant easing to continue

US Treasury yields pulled back yesterday from their extreme pricing of earlier in the week after four Fed members made their current thoughts known ahead of Chair Powell speaking this afternoon at the annual Jackson Hole symposium.

All four of yesterday’s speakers, George, Harker, Kashkari and Kaplan put a more neutral/hawkish bias on the table. Probably Harker was the most interesting, being a middle of the road thinker in regard to a dovish or hawkish standing, although not the most influential given he is a non-voter until 2021. He said that he ‘somewhat reluctantly’ supported the 25bp cut in July which is not what the market was looking for ahead of Powell’s speech. It could be that the Fed members are trying to reign in market expectations for further aggressive easing next year which had been priced in before the backup in yields yesterday afternoon, indeed the two-year note moved higher by 10bp as did the thirty-year bond.

We retain our view that the Fed remains data-dependent at this juncture and is trying to limit the market pricing for next year with a 25bp further cut in September still very likely as economic data continues to be on the weaker side of expectations. The PMI data yesterday is an example with the first sub-50 print since 2009, although the market is more focussed on the ISM series, this is somewhat worrying for risk assets in general.

We still think we are seeing signs of weakening growth moving forward and feel the Fed is trying to calm the market while awaiting further detail. However, we continue to position our funds long in duration with a high relative weighted credit stance expecting further economic weakness to become evident with any pullback in pricing representing a further buying opportunity for highly-rated assets.

Have a great weekend

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