As widely expected the Fed cut rates again last night moving the fund’s target range to the 1.5% to 1.75% range. Strangely the UST curve bull steepened with the long-end dropping 8bps and the 2-year note just 4bps; normally a cut would lead to a steepening yield curve with the short-end outperforming, We feel this is due to the still benign inflation outlook and the rather ‘hawkish’ comments from the Fed Chair continue to be supportive of longer-dated assets.
Regarding inflation, Powell opined ‘we would need to see a really significant move up in inflation that’s persistent before we would consider raising rates to address inflation concerns’, so the Fed are really not, at this juncture, thinking that inflation will emerge. The market has also reduced the chances of a further December cut to just 22% which has also supported longer dated assets and keeps the inflationary outlook further contained.
We do feel that the Fed have now completed their ‘mid-term insurance adjustment’ to rates and like us all will go back to being data dependent and even though the trade risks and a no-deal Brexit seem to be fading, which the Fed mentioned, we retain our view that these are side issues. These two factors can cause shorter term blips to activity/market concerns but the underlying fundamentals still point to a weakening in economic activity. Broadly, we look for a further cut in the funds rate although this may not come along until Q1 next year not in December unless there are very disappointing holiday sales before year-end and consumer confidence and activity does take a dive.
Neither trade nor Brexit are truly in the rear mirror and the uncertainty around the 2020 US elections will be increasingly in focus in the New Year, the Fed’s cut will help, but we remain increasingly concerned for the economic outlook, globally.