The First Cut may be the Deepest

Fed Chair Powell is no Cat Stevens or Rod Stewart, but there’s a good chance he’ll be singing this tune today… The First Cut is the Deepest!

There is almost always an element of surprise surrounding every Fed Meeting - particularly when there is a cut or a hike in play. We never know until we know.

This time around the markets are trying to make things even more interesting. What started out as a simple start to the long-awaited normalization cycle may actually turn into an easing cycle. By default, 25bps or 0.25% was supposed to be the first cut. Yet now, the market is convinced that things are much worse in the US economy and the Fed is already behind the curve. They’re looking for 50bps or 0.50%.

I posted a version of this chart on Monday and it’s still relevant. Both Yields and Commodities are pricing in a more dire situation signalling that they should do a jumbo-sized cut. And it is all about the economy. Yesterday’s US Retail Sales number saw yields reprice marginally higher because we saw a positive number where a negative one was expected. The idea is that the consumer is still strong and GDP growth will not tank.

We’ve got a few developed market Central Banks that have already cut 50bps, but every one of them started with 25bps. We’ve already had 2 cuts from the ECB, Bank of Canada, Swiss National Bank, and the Riksbank, and now the market presumes that the Fed is falling behind.

And yet no one is looking at the difference in GDP Growth. The US is far above the rest.

We’ve had several hints from various sources that the Fed is also entertaining a cut of 50bps:

• Nick Timiraos of the Wall Street Journal

• Bill Dudley (former Fed member)

• Lael Brainard (former Fed Vice Chair)

• WSJ Chief Economic Commentator

So now we have a situation where the market is most likely expecting a 50bp cut and if the Fed decides to start with 25bps, that may cause some disappointment.

Bottom line here: The market wants a 50bp cut at this stage and if the Fed goes ahead with it, the market will see this as a signal that the Fed is willing to do what it takes to get ahead of a deteriorating labor market, avoid a recession, and engineer a soft landing.

Subscribe to MacroVisor Premium to read the rest.