So the result of the Stratton Street sweep stake as to the timing of President Trump’s reaction to the Fed 25bp rate cut last night, drum roll……..3 hours and 17 minutes after the Fed announcement (3 hours and 7 minutes after my guess) is the winning ticket with a “Powell let us down” tweet.
The Fed cut rates for the first time in a decade although there were two dissenters, Rosengren and George; they also announced they will stop their balance sheet runoff two months ahead of schedule now in August. However, there was conflicting messages in the press conference where Chairman Powell described the cut as a “mid-term policy correction” and intended to “insure against downside risks from weak growth and trade uncertainties” only then to comment that he was concerned for the risks to global growth, manufacturing and below target inflation. This caused a stormy session for bond yields and the stock market. Indeed the Treasury curve flattened as the long bond rallied 3bp while two year yields are this morning 6bp higher than they were yesterday morning.
In regard to the runoff of the balance sheet, this means they will start reinvesting maturing Treasury securities, which is thought to be about $15bln in August and $13bln in September. This will increase their add-on purchases at auctions and also decrease the Treasuries funding needs by the same amount. They will also start investing proceeds from maturing Mortgage Backed Securities (MBS) of about $20bln a month into Treasuries via open market operations, all helping to alleviate the funding requirements of the government.
As to the future outlook from the Fed and the chances for a further September cut, it would appear we are again data dependent with the Non-Farm Payrolls release tomorrow and today's ISM and the manufacturing PMI the first key reports on show. At this juncture we are 50:50 on a September rate cut but we would expect bond yields to be lower at year end than they are today. September could be very interesting, my birthday, the restart of trade talks and the September 18th Fed gathering plus we should all be over our post-holiday blues.
In the meantime, happy holidays and happy markets is the forecast.