Fed Front-Loading As Central Bank Bonanza Continues

WHERE WE STAND – A dovish 25bp Fed cut + a front-loading of cuts + a Fed wanting to support growth = about as good a mix as you can get for risk.

To be honest, I could leave this morning’s note at that, as it’s really the key – only? – takeaway from what Powell & Co got up to at the September meeting. However, in the interests of good order, and not looking like I’m completely slacking off for the day, I should probably provide a more comprehensive view.

That 25bp cut, which lowered the target range to the fed funds rate to 4.00% - 4.25%, was not a unanimous decision among Committee members, with new Governor – and Trump puppet – Steve Miran, dissenting in favour of a larger 50bp move. Meanwhile, the updated SEP pointed to faster growth, a higher inflation profile (albeit still a return to 2% in 2 years’ time), and broadly unchanged unemployment projections. In light of these projections, and the balance of risks shifting towards a slowing labour market, the updated ‘dot plot’ pencilled in a front-loading of cuts, with 2x further 25bp cuts expected this year, followed by just one cut in 2026 and 2027.

That ‘front-loading’ is probably the most important part of all this, to me, as it suggests the longer-run dots should be taken with a huge pinch of salt. If labour market weakness persists, then the Fed will continue to cut. And, in any case, the monetary policy backdrop is set to become much easier, much sooner, than most participants had been expecting. While Chair Powell’s talk of ‘risk management’ cuts at the press conference does cast a bit of doubt on that idea, I’m inclined to take it all with a large pinch of salt, given that the presser made one hosted by ECB President Lagarde seem composed, and coherent.

Whatever, markets suffered from a severe case of whiplash in the aftermath of all the above, with an initial dovish cross-asset reaction giving way to a ‘buy the rumour, sell the fact’ trade as the presser wore on. The net result of all that, mind, was simply to see spoos, the buck, and USTs (at the front-end) ping back to where they were pre-FOMC within about an hour of the announcement itself. If nothing else, this reinforces my long-standing view that intraday price action is little more than noise, from which precious little signal is usually able to be extracted.

I guess the big question from all this is whether I feel inclined to alter any of my longer-standing views?

In short, not really. My bull case for equities remains intact, especially with the ‘Fed put’ seemingly now back in play – a put, of course, that has 400-odd basis points of ammunition, plus the balance sheet to play with if necessary. Elsewhere, my view on USTs remains biased towards a steeper curve, given that jitters over persistent inflationary pressures are unlikely to entirely subside any time soon, nor is the erosion of Fed policy independence.

Let’s not forget that we’re in a farcical situation where the CEA Chair is simultaneously a Fed Governor! That should keep gold underpinned, while also pose further headwinds to the greenback, which shan’t be helped by a Fed that now possesses a clear, and undeniable, easing bias, with risks to the outlook tilted in a distinctly dovish direction.

LOOK AHEAD – Right then, after the ‘fun’ of the FOMC yesterday, we’ve got more where that came from today.

In brief – the Norges Bank will deliver a 25bp cut this morning, and probably signal more to come in the quarters ahead; the Bank of England will stand pat at lunchtime, in a 7-2 vote, while probably trimming the QT envelope to £65bln over the next 12 months; and, overnight, the Bank of Japan will hold rates steady, though political uncertainty is unlikely to deter them from another hike if the outlook is realised.

Elsewhere, we get the latest Philly Fed manufacturing figures this afternoon, along with the weekly US jobless claims figures. The initial claims print, which coincides with the September nonfarm payrolls survey week, should retreat to a more ‘normal’ 240k, after fraudulent claims drove last week’s surge.

The only other item of note on today’s docket is earnings from FedEx…let’s see if they deliver after the close…(sorry!).