Nikko Asset Management Asks: Will The Fed Cut Rates At The Next Meeting?

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HFA Staff
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A commentary by Naomi Fink, Global Strategist at Nikko Asset Management, on her prediction for tomorrow’s Fed decision and its impact on the global economy and markets:

"The May Nonfarm payrolls were probably too strong for the Fed to cut at its June meeting. That said, the data may be one bullish current indicator amid more disinflationary forward-looking indicators. The latter include the softer inflation sub-index of May Michigan sentiment, moderating April JOLTS, softer prices paid for both Manufacturing and Services ISM, and some softer construction indicators.

One big reason however that this meeting will be in strong focus is because of the greater policy guidance that we will get from the Summary of Economic Projections (the quarterly "dot plots") and the Monetary Policy Report, which will contain updated forecasts on major indicators including growth and inflation and also a revised estimate of future rate moves. We maintain that as inflationary indicators soften, there is some likelihood that the Fed will still foresee one rate cut in 2024 (sometime in H2), however will be restricted by higher inflation data to offer easing beyond this.

May CPI is due for release before the Fed’s rate decision, and it is likely that we will see a mild deceleration in core CPI. At the same time, we note that inflation probably sits nowhere near the Fed’s 2% guidance, which should reinforce the likelihood that the FOMC stays on hold this month.

Looking at the bigger picture, we are still in a higher secular inflation environment, and it is very unlikely that we will return to the pre-pandemic combination of low inflation and low rates. Moreover, the fiscal impulse and supply/demand dynamics of US debt probably means that there should be continued upside pressure to long-end yields.

Conversely, in view of the appreciation to date in dollar yen (even as the BOJ withdrew stimulus and the Fed remained on hold) the currency pair has probably already sufficiently priced in higher-for-longer policy from the Fed. Meanwhile, although it is logical that Japan probably sold US Treasuries to fund interventions, the market may yet not have connected fully the rise in US interest rates with overseas investors selling off the US duration."

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