Fed View: Powell signals mini-cut cycle – The FOMC lowered the target range for the fed funds rate by 25bp to 2.00-2.25%, as widely expected. Fed Chair Powell made a robust case for the move in his press conference, citing three key motivations: to insure against downside risks from trade tensions and the global manufacturing slowdown, to offset the effects those factors are already having on activity in the US (specifically the manufacturing sector), and finally, to bring inflation back to target. In addition to these, Powell also noted the decline in neutral rate estimates of FOMC members, which suggested the current policy stance was less accommodative than previously thought, as well as the decline in NAIRU estimates, which suggests more room for the labour market to expand without significant inflationary pressure.
However, Powell also sought to manage expectations for further aggressive rate cuts. When questioned on whether one 25bp cut would be enough, he emphasised the path the FOMC has been on since the beginning of the year, moving from a hiking bias, to a neutral stance, and then to an easing bias – and how this by itself had provided significant stimulus by easing financial conditions. He also repeatedly said that today’s move was ‘not the start of a long cutting cycle’; however, when pressed on this, he also said ‘I didn’t say it’s just one rate cut’, but stressed that the evolution of factors that drove today’s move would dictate how much further accommodation might be needed. Indeed, the statement also retained the key phrase that the Committee would ‘act as appropriate to sustain the expansion’.
As we had flagged in our preview, Powell failed to ‘out-dove’ market expectations for rate cuts, with equity markets declining, the dollar rising, and OIS pricing of rate cuts receding c.7bp (with 58bp of cuts still priced by next year). 10y Treasury yields initially spiked but are now c.5bp below the level before the FOMC decision. All told, the outcome today supports our view that the Fed will deliver an additional two 25bp cuts by Q1 2020. (Bill Diviney)
Euro Macro: First estimate of Q2 GDP in line with the consensus forecast – The first estimate of eurozone Q2 GDP growth was in line with the consensus forecast, at 0.2% qoq. The result was somewhat more positive than we had expected (close to stagnation). A number of individual countries have published estimates for growth so far, for instance Spain (down to 0.5% qoq from 0.7% qoq in Q1) Italy (down to zero from +0.1%), France (down to 0.2% from 0.3%), Belgium (down to 0.2% from 0.3% as well). However, the largest member state Germany, where the economy is expected to have contracted in Q2, will wait two more weeks before publishing Q2 GDP data. Moreover, Eurostat has not published any details for eurozone growth and a number of monthly activity data for June (for instance retail sales and industrial production) still has to be published. Considering that business confidence and consumer confidence in the vast majority of counties (including Germany) fell noticeably in June, we think that downward revisions to the eurozone growth estimate of 0.2% qoq could be in the pipeline. Having said that, the annualized rate of growth in Q2 is close to our estimate for GDP growth for this year as a whole (of 0.7%). (Aline Schuiling)