Loading ...[short term this won’t help gold-short term the only rescue possibility is the jobs report]
By Peter Chatwell, head of rates at Mizuho
The phrase “mid-cycle adjustment” sent shudders through risk markets yesterday, during Powell’s press conference. Mid cycle! When corporate debt to GDP is at extremes, earnings growth slowing, and the US manufacturing sector close to contraction, this really does not look mid-cycle to us.
By delivering a 25bp insurance cut, the Fed actually tightened financial conditions for Main Street US, making subsequent easing more likely. The march higher of the USD is the main problem the Fed has to deal with. This has pushed our estimate of the neutral nominal Fed Funds rate much lower this year to under 1.4% and, with yesterday’s move, it could well fall further.
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The Fed had many opportunities to reduce market expectations for an easing cycle, but did not take them. In so doing they have repeated the December 2018 hike error, wasting ammunition, and long term US rates will rightly continue to fall from here. For the first time under Trump’s leadership, we see value in long end Treasuries here, as a Fed policy-error trade (for example as a 2s30s flattener)
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