Is it just Haste?
- 29 July 2024 (10 min read)
Bill Dudley called on the Fed to cut its policy rate this week already, given the accumulating signs the US economy is landing, with cracks appearing in particular in the spending capacity of households towards the bottom of the income ladder. We agree that the latest PCE print should open the door wide to a proper shift in the Fed’s policy stance - while we never believed in the market’s enthusiasm until last winter for half of dozen cuts in 2024, we also rejected the “no cut this year“ hypothesis - but the Q2 print for GDP was probably “too decent” to get the FOMC into emergency mode. In any case, Jay Powell can easily dispose of the “lateness critique” by telegraphing quite clearly that a cut will come in September, and that it would be start of a “restriction removal” process.
We continue to focus more on the difficulty for the Fed to continue cutting in 2025 if D. Trump is elected. The US presidential race has tightened, and although we don’t expect economic issues to rank very high in the next three months’ debates, the outcome will matter enormously in the global economic sphere. In this context, we review the China’s Communist Party’s Plenum communiqué which in our view confirmed Beijing’s focus on the supply-side of the economy. We continue to think domestic demand remains China’s weak point, and we are struck by how more and more countries – even in the Global South – are taking measures against imports of Chinese products.
The BOE and the BOJ meet this week amid unclear macro conditions at home. On balance, we think the BOE will cut by 25 bps, but it is a close call as the MPC is likely to be divided. The BOJ needs to normalise its stance faster to support the currency, but the economy continues to be mediocre. We think combining a massive reduction in the quantum of bond purchases - straight to 3 trillion a month - with a rate hike would be too daunting.
Finally, we look at the recent business confidence surveys in the Euro area. In France they confirm a wait-and-see attitude has taken hold of the corporate sector amid still high political uncertainty, but we draw attention to the softness of German indicators. This should help ECB hawks accept not to stand in the way of a cut in September.
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