It is an incredibly important week for markets with the big focus on the monetary policy meeting of the Federal Reserve. A rate cut is guaranteed, but what will forward guidance bring? We look at the impact on forex, equities and commodities.
The Federal Reserve has been tightening monetary policy since December 2015. However, there is overwhelming expectation that the tightening cycle will end with a rate cut on Wednesday. However, the issue market has been grappling over for the past few weeks, is whether it is one and done for the Fed, or whether this is set to be the first of a series of cuts. It is our expectation that the Fed will cut by 25 basis points on Wednesday. A cut and then wait and see. Looking at the US economy, the run rate of economic growth in 2019 is around 2% to 2.5%. Inflation on core PCE is running below the 2% target, but recently inflation expectations have picked up notably. Earnings growth remains solid at 3.1% so real wage growth is still well over a percent. Consumer confidence (an important indicator for an economy c. 70% household consumption) also remains solid. However, the slowdown in business fixed investment is a concern for the FOMC in light of the ongoing trade dispute, something Fed chair Powell was keen to point out in his recent Congressional testimony. Subsequently we expect this will be an insurance cut, with a view to further cuts if the trade dispute deteriorates in the coming months. Watch for the number of dissents on the FOMC on this rate cut too. Fed funds futures are pricing in at least two cuts by December and three cuts within the next 12 months, something we think is too dovish and needs to be rolled back. This should help to maintain the dollar as the main outperforming major currency (even if Dollar Index may have already seen its highs for 2019).