The MUFG Global Markets Podcast

The 1st cut in the cycle, 50bp or bust?

On the back of a recently published FOMC preview report, this week George Goncalves, MUFG Head of U.S. Macro Strategy, walks us through what to expect at the September FOMC meeting and the rationale for why our house view is calling for the first cut to be 50bps. George also explores how this easing cycle may progress. In George’s view, this is a historical event because this easing cycle is being launched as a preemptive move to avoid further cooling in the labor market and economy. In the last few easing cycles, the Fed has lowered rates in reaction to a specific event or catalyst (i.e. dot.com bust, GFC and the pandemic) that shocks and quickly weakens the economy (forcing the Fed into action). This time the Fed has seen the macro environment turn and is being cautious because recent data is likely overstating how healthy the economy truly is. Therefore, the Fed is trying to modulate rates with the goal of avoiding a hard landing due to macro reasons (driven by the impact of higher rates on consumer spending, small business activity and government finances). In our view, and as covered in the podcast and our FOMC preview report, there are plenty of reasons to start off with a 50bp cut. From a risk management perspective, there are two points to make.
If the Fed is behind the curve (we think they are, they should have eased this past summer), they should cut rates quicker at the start and then attenuate the speed later in the easing cycle.  
Although many surveys and forecasters are calling for 25bp cut, the market has priced in 50bps and to disappoint market pricing (which is embedded in all asset classes) runs the risk of acutely tightening financial conditions at the start of the easing cycle. That would be counterproductive and against the reason to cut in the first place.
Further down the road, as the Fed has a few cuts under its belt, at that stage is where we think there could be more push back from the Fed without triggering adverse market reactions. Lastly, we think the market has a lot of the potential cuts already priced-in for the overall cycle. Where one cannot definitively spell out at this point what is the right pace and final resting place for the Fed Funds rate. The election may have an impact during the early days of 2025 (as fiscal policy adjusts) too. We have been arguing the sooner the Fed starts, the less they may need to do. Its possible that we get pitstops along the way towards a neutral rate or it comes in a flash.
Bottom-line: We think 50bp is the best option in September. Post the first cut, the next moves from the Fed will come down to the outlook for the economy and markets.
 

What’s next for the USD ahead of the Fed’s pivotal policy meeting?

Lee Hardman, Senior Currency Analyst, and Reza Nasehi, Vice President of the Japanese Client Sales Group for EMEA in London, discuss how the Fed’s decision to begin cutting rates is likely to impact the USD in the week ahead. Will the Fed play catch up with other major central banks and cut rates more quickly?
Disclaimer: www.mufgresearch.com (PDF)

US Federal Reserve and commodities – Commodities outperform when the Fed cuts during soft landings

The US economy is en route towards a soft landing. Inflation is trending towards the Federal Reserve’s (Fed) 2% inflation target, and growth is cooling (not collapsing). The cyclical context matters as commodities enjoy positive returns during a “good” cutting cycle (growth firm, declining inflation), and vice versa, suffer negative returns during a “bad” cutting cycle (growth decelerating, sticky inflation).
To put this into perspective, Ehsan Khoman, Head of Research – Commodities, ESG and Emerging Markets (EMEA), delves into MUFG’s latest thought leadership report, titled, “US Federal Reserve and commodities – Commodities outperform when the Fed cuts during soft landings” (see here).

How the US elections may alter the contours of the US Inflation Reduction Act (IRA)

There has been no shortage of the figures attesting to the cosmic transformation of the US Inflation Reduction Act (IRA) – the largest clean energy and climate legislation in US history since its passage in August 2022. Yet, two years on the IRA is at a critical juncture with the impending US elections potentially altering the contours of what has been a goldilocks era of clean energy regulation.
To put this into perspective, Ehsan Khoman, Head of Research – Commodities, ESG and Emerging Markets (EMEA), delves into MUFG’s latest ESG thought leadership report, titled, “US Inflation Reduction Act (IRA) two years on – How the US elections may alter the contours of the capex supercycle” (see here), in this week’s podcast.
Disclaimer: www.mufgresearch.com (PDF)

FX Outlook and market pricing for the scale of rate cuts ahead

As the summer lull for the financial markets comes to an end, Derek Halpenny Head of Research Global markets EMEA & International Securities talks to Jack Greenslade in Corporate FX Sales about what lies ahead for the major currencies following some key developments in August and ahead of key central bank meetings. Are the financial markets correctly priced for the central bank easing cycles that have already started for some (ECB & BoE for example) and is set to commence for the Fed in September.
Disclaimer: www.mufgresearch.com (PDF)

Positioning ahead of US interest rate cuts across the sustainability complex

US Federal Reserve (Fed) Chair Powell’s remarks at the Jackson Hole symposium in August left no room for ambiguity on the direction for policy rates, with the Fed set to deliver the first non-recessionary interest rate cut on 18 September. From this, whilst it is acknowledged that an easing in interest rates will support sustainability-centric counterparties – as they tend to exhibit negative sensitivity to bond yields – the outperformance is not uniform across sectors.
In this week’s podcast, Ehsan Khoman, Head of Research – Commodities, ESG and Emerging Markets (EMEA), contextualises where investors could best position from a sectoral perspective to maximise returns across the sustainability complex as the US Federal Reserve begins to ease interest rates.
Disclaimer: www.mufgresearch.com (PDF)

The ghosts of August 2007 and the time has come for rate cuts post Jackson hole

This week George Goncalves, MUFG Head of U.S. Macro Strategy, reviews the last major macro event that happened this past Friday, the Fed’s Jackson hole symposium. Specifically chair Powell’s opening speech acknowledged that the labor market cooling is unmistakably happening now (and in reality has been in our view for many quarters) and thus the Fed has pivoted to worrying about the jobs picture. As a result, chair Powell said the “time has come” to start adjusting policy rates lower (likely at the September meeting) to help combat further labor market weakness. Given that many of the conditions that have led up to this Fed pivot formed the basis for our house view for the better part of the year, we have not made major changes to our outlook for the Fed, economy, and markets. Prior to the event we already had increased our odds for larger rate cuts, where if the August NFP is weak, the Fed will likely start this easing cycle with 50bps. Meanwhile, this month has felt much longer than the typical August summer, George echoed back to another similarly long and volatile August, the August of 2007. George believes that the conditions are different to back then but the valuation setup is similar in terms of markets that are over-valued and sentiment very complacent. George argues that 2007 taught us to value liquidity and watch out for vol triggers. 

Indonesia Policy and FX outlook

Lloyd Chan, Senior Currency Analyst at MUFG Global Markets Research Asia, speaks this week on Indonesia's monetary policy, fiscal policy, and the outlook for the Indonesian Rupiah, following Bank Indonesia's policy meeting and the annual Jackson Hole symposium last week. 
(Please see link to Disclaimer: Disclaimer - MUFG Research)

Powell suggests growing labour market concerns

This week, Derek Halpenny  Head of Research Global Markets EMEA & International Securities discusses with Seiko Kataoka-Fisher Head of JC FX Sales, the initial market reaction to the Jackson Hole speech by Fed Chair Powell. The speech highlighted a new Fed focus on downside labour market risks. After this week’s Democratic National Convention in Chicago Derek provides an update on US politics and how the FX market could be impacted.
Disclaimer: www.mufgresearch.com (PDF)

The status of Chinese economy, potential policies and the USDCNY

Lin Li, Head of Global Markets Research Asia, discusses USD/CNY pair’s recent movement and the forecast for next 12 months, the status of Chinese economy, and the potential policy support.
 
(Please see link to Disclaimer: Disclaimer - MUFG Research)