Fed preview – The time has come

The Fed will cut rates on Wednesday, but the size of the cut is not obvious yet. Markets assign almost 40% odds for a 50bp cut following articles in WSJ and FT weighing the merits of 50bp against 25bp. New projections will show at least three cuts for this year, but markets are pricing 115bp already so that starting with 25bp may disappoint. Unemployment projections will be revised higher while inflation beyond this year is likely to stay unchanged. Economic data has been slowing and not crashing, but real rates are well restrictive leaving ample room to cut. Starting with 50bp along with a cautious and calming message could give the Fed a head-start without spooking markets. Starting with 25bp requires a more dovish message to satisfy market pricing for the remainder of the year.

Central banks – No time for another BOJ shift

The BoJ and BoE will be on hold this week. The BoE started to cut earlier and has time to proceed at every other meeting, next again in November. The BoJ has released continued statements pointing to further hikes but at a cautious pace. Following the August JPY/NFP market shock and ahead of local LDP leadership elections, the BoJ is likely to hike once more later this year.

ECB review – No guidance for October

The ECB lowered rates by 25bp to 3.5% as expected, but gave no guidance for the steps ahead. Lagarde said it was “obvious” that rates are headed lower, but pointed to non-satisfactory domestic inflation and caution on slowing but high wages. Growth estimates were revised lower by 0.1% across the projection horizon, while core inflation was revised higher for 2024 and 2025.  This left markets pricing only a 30% chance for a cut in October, but still 40bp by the remainder of the year.

Algebris Investments’ Global Credit Team