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Market Reactions to 50
How FX and yields reacted to today's Fed cut and a look at the relationship between inflation and policy rates
Mobius Intel Brief:
The Federal Reserve moved as outlined in last Wednesday’s post-CPI Intel Brief, cutting the fed funds rate by 50 bps to a target range of 475-500 bps.
Yield and FX Reactions
Intraday performance during the 40 minutes between 12:55-13:35 CST shows 2YR and 10YR UST yields shed 10.3 bps and 4.4 bps, respectively, before gaining on Fed Chair J. Powell’s after-action press conference.
The 2s10s spread (10YR yield - 2YR yield) finished the day at 8.4 bps v. 3.7 bps on Sep. 17 close.
Reactions were similarly evident in FX markets, with the dollar losing ground to all six members of the USD index. The Japanese yen and Swiss franc, the two leading carry trade funding currencies, led D/D gains against the dollar (+0.46%, +0.34%).
While most US-based hedge funds unwound their yen-funded carry trades in August, near-term gains against the dollar warrant monitoring.
US-based leveraged fund managers’ yen futures and options holdings returned to a net short of -12,967 contracts last week ($1.15B).
Likewise, Bank of International Settlements data through 1Q24 shows total yen-denominated cross-border claims reached approximately $2.28 trillion — an increase of $740 billion since 4Q21.
Press Conference Notes
Post-decision commentary from J. Powell reinforced the Fed’s “dual mandate goals of maximum employment and stable prices.”
In the two prior instances of a 50 bps start to the Fed’s policy rate cuts since 1984, annualized inflation (all-item CPI) gained moderately (2001) and significantly (2008). In both cases, the U.S. economy subsequently fell into a recession with elevated unemployment.
Regarding the latter point on unemployment, Jeanna Smialek of the NYT posed the following question to J. Powell during today’s post-decision press conference:
“Your economic projections today see the unemployment rate climbing to 4.4% and staying there. Obviously, historically, when the unemployment rate climbs that much over a relatively short period of time, it doesn’t just typically stop. It continues increasing, so I wonder if you can walk us through why you see the labor market stabilizing? What’s the mechanism there?
Chair Powell’s response:
“So, um, again, the labor market is actually in solid condition, and our intention with our policy move today is to keep it there. You can say that about the whole economy. The U.S. economy is in good shape. It’s growing at a solid pace, inflation is coming down, the labor market is in a strong [place]. We want to keep it there. That’s what we’re doing.
Indeed, many elements of the 2024 economy are confounding variables to consider when performing historical labor market comparisons. For example, productivity gains from emerging technology (AI) are likely underappreciated over a long timescale.
Still, substantial revisions to 2023-2024 employment data indicate material flaws in the Fed’s lagging data feed that warrant noting.
In line with this theme, a “rate of rates” analysis of the US unemployment rate shows the Y/Y % change of the latest US unemployment data triggered levels only seen heading into prior recessions.
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