The FOMC is fully prepared for a rate cut; the rest depends on the Trump administration's US-China trade negotiations [From YEN Kura's newsletter]
From YENKura-san's investment newsletter "Real Top Trading" provided by GogoJungle, here is a portion from this morning's distribution.
【Market View】
After passing the important event FOMC, stocks rose, bond yields fell, the dollar weakened, and the yen weakened, signaling risk-on sentiment. Let's analyze the results of the FOMC.
Monetary policy left the policy rate (FF rate) at 2.25–2.5% as expected. However, the FOMC signaled a dovish message. In the statement, it shifted from “being patient” to “monitoring carefully and acting appropriately to sustain growth” as its policy stance. The central tendency of the dot plot for FF rate projections remained at 2.375% for end-2019 (3/2.375%), 2.125% for end-2020 (2.625%), 2.375% for end-2021 (2.625%), and a long-term 2.5% (2.75%). Although the end-2019 median did not change compared with March, the stance remained on hold with two rate cuts being a possibility, raising the probability of two rate cuts being priced in.
Changes in the statement and in the dot plot led the market to view the FOMC stance as dovish.
The FOMC’s economic outlook updated the forecast for year-over-year GDP growth to 2.05% in 2019, 2.1%; 2020 to 2.0%; 2021 to 1.9%. The view of the current economy shifted somewhat downward, but overall activity remained expanding amid a robust growth pace while inflation stayed subdued, raising concerns about uncertainty in economic growth and the risk of inflation undershoot, prompting a more dovish stance to address it.
Moreover, at the G20 Osaka Summit on the 28th-29th this week, a U.S.-China summit is scheduled, which may ease tensions between the two countries to some extent.
Last week, the market favored risk because of the FOMC’s easing stance and expectations for progress in U.S.-China relations.
As mentioned in last week’s weekly report, for President Trump seeking re-election, it would be best for the economy to perform well and for stock prices to rise from spring to summer next year. In that context, this year may see some slowdown in stock prices and the economy, but Trump may maintain a firm stance toward other countries, including China, to justify his policies. To prevent a crash in the economy and stock prices, monetary easing may be necessary.
If some agreement or postponement emerges at this G20 and it calms the market enough to push U.S. stocks to new highs, July rate cuts could be postponed.
The FOMC has prepared to implement monetary easing anytime in response to U.S.-China risks. While keeping that readiness, it is likely to maintain a strategy of signaling monetary easing to keep market expectations elevated, watching how trade negotiations under the Trump administration unfold.
Quoted from YENKura's real-time e-newsletter “Real Top Trading” (Gaku Tadashi).
It is true that last week's FOMC increased expectations for rate cuts, but the timing seems to depend on how President Trump handles and progresses U.S.-China relations. This week, indicators, comments from the Fed Chair, and the Osaka G20 summit over the weekend are crucial, so please stay tuned. (Editorial staff)
