“If they don’t move, they are definitely gonna increase the risk of recession”

Last week, we flagged Bill Dudley’s abrupt change of mind: he now advocates immediate rate cuts. One might be forgiven for suspecting Bill had spent the week lobbying his old colleagues because the July 31st FOMC statement, and J Powell’s subsequent presser gave rates markets quite the boost. Of course, there were the usual Powell caveats: “If we were to see, for example, inflation moving down quickly – or more or less in line with expectations – growth remains reasonably strong, and the labor market remains consistent with its current condition, then I would think that a rate cut could be on the table at the September meeting”. But judging from SOFR pricing, the market took Powell’s caveats as mere teasing. Powell’s presser comments suggested maybe 50bps of cuts by year-end, but Dec 25 SOFR pricing suggests at least 75bps.

Perhaps the rampant “optimism” surrounding US policy rates isn’t that surprising. The US is far from the only country where Central bankers no longer feel inhibited by inflation. The BoE just cut rates for the first time in four years, on the heels of a second successive Swiss easing. Naturally, it was a “hawkish cut” (is there any other kind?), but one might still consider it a dovish omen. The Quarterly Refunding Announcement might also have been taken as good news by fans of US Treasuries. We mentioned the Miran-Roubini paper last week, which argued that Yellen’s Treasury department had restricted the supply of duration by leaning towards issuing more T-bills: they characterized this as a form of “stealth QE”. Naturally, the Treasury Secretary pushed back against this suggestion – “I can assure you 100% that there is no such strategy. We have never, ever discussed anything of the sort” and we have no difficulty believing her. Paying less interest and boosting asset values in an election year? What’s to discuss? Still, Wednesday’s announcement that UST would leave the proportion of longer debt to bills unchanged for several quarters might conceivably be taken as an excellent reason to buy duration: buy now while stocks last. Add to all that the tightening in financial conditions from softening in both equity and real estate markets and it really isn’t hard to see why SOFR prices what it prices.

The door to a global rate cut “party” seems wide open everywhere, at least until an unwelcome CPI gatecrasher turns up (now wouldn’t that make a mess!?). That’s not to say there isn’t a global exception, but given it is Japan it might be thought to prove the rule. The BoJ, which seems to be chronically out of step with global monetary policy, finally raised rates “to levels unseen in 15 years” (i.e. 25bps), and threatened to slow its JGB buying. We can see why some might be unimpressed, but long-time readers will be aware of our views on the availability of global savings. We suspect this BoJ tightening will be considered more significant in the future.

Want More MI2?

Tune in to a recent episode of Palisades Gold Radio, where host Tom Bodrovics welcomes back Julian Brigden, co-founder of Macro Intelligence 2 Partners, to discuss the current economic condition referred to as ‘macro purgatory.’

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