Danske Bank analysts note that the market sentiment turned swiftly positive yesterday as prominent FOMC board members of the New York Fed, Williams and Vice Chair Clarida, delivered very soft remarks highlighting the need for swift action before economic data actually turns for the worse.
Key Quotes
“The remarks at first seemed very coordinated, driving a weaker USD, a drop in front US yields and a sharp rally in the August Fed funds futures, essentially leaving market pricing skewed towards a 50bp July cut rather than the consensus 25bp cut. Meanwhile, this morning, the New York Fed stressed that Williams had not tried to send a specific policy signal, leading to a rebound of more than half the initial drop in US 2Y swap rates, even if the USD FX gains were more modest with EUR/USD, for example, staying around 1.1260.”
“Where does this leave us in terms of the Fed and the forthcoming 31 July meeting? Yesterday’s remarks were highly surprising given the Fed’s communication earlier this week that seemed to want to limit market pricing of a 50bp July cut. Meanwhile, with little time until the one-week silent period, markets now have a 25bp July cut at 60% and a 50bp cut at 40% probability.”
“We know that historically the Fed has not wanted to surprise markets at the meetings, leaving the coming sessions’ FOMC comments crucial. For now, our call remains a 25bp cut at the 31 July meeting and an additional 50bp worth of cuts for the rest of the year. However, we must acknowledge the probability of this call getting modified towards a more aggressive July call if we get further very soft Fed remarks.”
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