Home Door open for extra rate cuts by the Fed – UOB
FXStreet News

Door open for extra rate cuts by the Fed – UOB

Economists at UOB Group assessed the recent escalation in the US-China trade tensions as well as a potential reaction by the Federal Reserve.

Key Quotes

“With US-China trade tensions escalating further, we have now entered the Worst Case Scenario of our earlier assessment. Furthermore, the situation could worsen further from here”.

“We now see our base case scenario that US and China imposition of additional tariffs on nearly all bilateral merchandise trade flows will materialise and stay at least in the near-term and there is potential for further retaliations which may involve restrictions on technology transfer and other non-trade measures. Any trade deal, if it happens, may only be in 1H2020 at the earliest. In our New Worst Case Scenario (at 35% probability), services trade and other areas including investment restrictions and rare earth export could become targets while the tariff rate on the entire merchandise trade between the two countries may be increased further”.

“The escalation in US-China trade tensions will probably cause our 2019 growth forecast of 6.2% to drop by 0.1% point if the announced additional tariffs are implemented as scheduled. With 1H19 growth at 6.3% y/y, this would mean that 2H19 growth could be just bordering at 6.0% y/y”.

“Counter-cyclical measures remain crucial to support growth as downside risks increase. We expect another two broad-based cuts to banks’ reserve requirement ratio (RRR) this year and see the likelihood for the 1Y Medium-term Lending Facility (MLF) to be cut by 25 bps in the base case and by more should the tensions escalate further. Fiscal measures and infrastructure spending are expected to be stepped up as well”.

“Overall, we expect CNY to trade with downside bias against the USD and advise investors to hedge their USD risk”.

“Meanwhile, market’s initial hopes for a risk supportive Powell message at Jackson Hole did not materialize as the Fed Reserve chief stuck to his old script, reiterating his pledge to act as appropriate to sustain the US expansion while acknowledging the factors that are impacting the favorable US outlook: “slowing global growth, trade policy uncertainty, and muted inflation”.

“The latest intensification of the US-China tariff fight took us by surprise and we believe this will now “push” the Fed to take on more rate cuts in 2019. We now expect the Fed to cut the FFTR by another 25bps in the 17/18 Sep 2019 FOMC. We also project two more 25bps rate cuts in the 29/30 Oct 2019 FOMC and the 10/11 Dec 2019 FOMC, to bring the upper bound of the FFTR lower to 1.5%, well below the 2% inflation target”.

FX Street

FX Street

FXStreet is the leading independent portal dedicated to the Foreign Exchange (Forex) market. It was launched in 2000 and the portal has always been proud of their unyielding commitment to provide objective and unbiased information, to enable their users to take better and more confident decisions.