Darius Dale: Now I want to talk about the Fed. In yesterday’s smack-down, the implied probability of a 50 basis point rate cut, not a 25 basis point cut but a 50 basis point cut, was 17% prior to the selloff. Now it’s at 37%. This is the implied probability of a 50 basis point cut on the 18th of next month.
The Fed has historically, or at least in the modern era, not really moved outside of what has been priced into markets as it relates to their policy meetings. So to Private Equity Powell, what the market is effectively saying is that we need to see more of these smack-down-type days for bond investors to get on board with PE Powell convincing the two dissenters from the July 31st rate cut – Rosengren and George – on a 50 basis point cut.
You'd have to get these two from dissenting on a 25 basis point cut to signing off on a 50 basis point cut. We don’t know how many more down days we’d need to see for that to happen but clearly the market is suggesting we’d need to see more.
Looking at the curve, 10s/2s is pancaked to flat. The 3-month/10-year curve is down at 39 basis points. That’s a new low this morning. So clearly, the Fed is behind the curve but the implied probability for the September meeting continues to suggest that the Fed is going to remain behind the curve heading into Q4 and that’s obviously a big market risk.
So we have Jackson Hole coming up, from the 22nd to the 24th of this month, and we’ll start to see the tea leaves and PE Powell’s response to Donald Trump and the response to the market and obviously their ability to get the broader central bank on board with a 50 basis point cut, which clearly the markets are signaling they need.