The Weekly Update

Last week we saw the short-end of the market start to price in three 25bp cuts to the funds rate this year and then nothing more, which is a little strange. Some argue for an ‘insurance cut’ as early as this week’s FOMC meeting sighting the Middle East situation, trade tensions and some further evidence of economic weakness, notably the last payrolls data. We feel a cut this week is unlikely; it is also unlikely that the Fed would cut three times and stop as the market is pricing.

Also, Mario Draghi and Christine Lagarde both gave stark warnings about the global outlook and the increasing headwinds that the world economy could face. At a conference, Lagarde told the audience ‘Global growth has been subdued for more than six years and the largest economies in the world are putting up, or threatening to put up, new trade barriers. And this might be the beginning of something else, which might affect us all in a more broad way’ adding ‘These troubling developments will create headwinds for all, but certainly for the CESEE (central, eastern and south-eastern European) growth model, a model that has relied on openness and integration’.

This month also marks ten years of the current US economic expansion, if we extend this cycle into July then this will be the longest expansionary period since 1854 (according to that one-armed economist) surpassing the 1991-2001 growth cycle.

That achievement is impressive; however, it is difficult to find any great highlights to the current expansion except maybe the current low unemployment level with the rate at 3.6% in May, the lowest in 50 years. So why has wage inflation not raised its head in any meaningful way as would normally be expected by all our one-armed friends? This has confused observers over the recent past: the Fed raised the funds rate naming tightening labour market conditions as a major reason, looking for wage growth to push up price indicators. However, we still see official inflationary measures below the Fed’s 2% target.

Looking forward to this week we have a big week for central bank decisions. Benoit Coeure, a European Central Bank board member, said today that if the ECB decided cutting rates was the best option, it would have to consider the effect of negative rates on banks and whether tiering was needed. On Wednesday we have the FOMC rate decision, where we feel the board will hold fire, accompanied by key data on home building and existing home sales are released around it. The current market probability for a rate cut is just below 20%.  Regional data from the Empire and Philadelphia regions will also be released in the week. Thursday brings us BoJ and BoE. Again, we feel it’s likely that both will also stand pat on rates, even in the face of some deteriorating indicators, however, the outlook from both could move to a more dovish tone.

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