Fed Preview – Hints for cuts
The Fed will keep rates unchanged but likely to open the door to a first rate cut in September. US economic data has recently been mixed, but most importantly inflation had surprised to the downside twice and labour markets are easing slowly. Notably, ex-Fed Bill Dudley reversed his previous hawkish stance and called for a Fed cut as soon as this meeting, supporting the dovish momentum. If not at this meeting, Powell will have another chance to cement the September cut at the Jackson Hole symposium on 22-24 August, one month ahead of the September meeting. Markets are fully pricing the September cut and imply 65bp by year-end, so more dovish data will skew the risks towards back-to-back cuts. After July, there are three Fed meetings left this year.

China – Policy easing
The PBoC surprisingly cut their one-year policy rate by 0.2% to 2.3%, the most since April 2020. China’s economic data is surprising negatively, as measured by Citi’s Economic Surprise index at -26.2. GDP for Q2 had surprised to the downside at 4.7% versus 5.1% survey, and the governments growth target for 2024 of around 5% is at risk. The Third Plenum showed little desire to commit substantial stimulus, and Bloomberg’s Credit Impulse index shows only moderate support. Rate cuts are meant to stabilise the economy, ahead of looming tariff threats by Donald Trump.

US Elections – More balanced
Kamala Harris established herself last week as the most likely nominee for the Democrats into this year’s election, following Biden’s step aside. The replacement has made the race between Democrats and Republicans more balanced, and Harris versus Trump is seen as much closer than Biden versus Trump before. Polling averages see Trump leading Harris by 48% to 46%, while betting markets see Trump winning at a larger margin of 57% to 46%.

Risk Assets – Summer hiccup
This year’s top-performing trades took a breather over the past two weeks, as stretched positions were unwound and led to strong moves across equity, rates and FX. The S&P500 came down 5% from its peak on the back of disappointing tech earnings, while USDJPY dropped almost 6% on dovish Fed and hawkish BoJ language. US 2Y yields fell some 20bp to 4.4%, as weaker US data fuelled concerns for a faster Fed cutting cycle. Some positioning in markets has been unwound, but valuations remain stretched across most popular trades. August has been a very negative month for risk assets over the past two years, so we are wary of further unwinds.

Algebris Investments’ Global Credit Team