Markets increasingly expect 50bp Fed cut

• Mixed start in Europe.

• USDJPY falls into one-year low.

• Markets increasingly expect 50bp Fed cut.

A mixed start for European equities has seen markets lack conviction as we move into a week that is expected to bring big volatility across the spectrum for financial markets. Coming off the back of an Asian session that similarly saw a lack of overall direction, we could be faced with a period of choppiness as we weigh up the repercussions of the impending rate decisions from the Fed, BoE, and BoJ. For the most part today represents the calm before the storm, with the Empire State Manufacturing index providing the one major focal point for traders. Given the recent volatility seen around the ISM manufacturing PMI, there appears to be a growing concern over the direction of the sector going forward.

Notably, the declines seen for USDJPY continue to raise questions around the unwinding of the yen carry trade, with the pair falling into the lowest level in over a year. With significant uncertainty over how much of the carry trade is yet to unwind, we are faced with the concerning prospect of a US equity selloff if the Fed weaken the dollar further via a 50-basis point rate cut on Wednesday.

The shifting expectations around the Federal Reserve’s interest rate trajectory opens us up for significant volatility, with the CME highlighting that we have seen a major shift towards a potential raft of oversized cuts in the months ahead. Markets are now pricing a 59% chance of a 50bp cut on Wednesday. However, with a whopping 63% attributed to 125-150bp of easing over the coming three meetings, markets may be getting a little carried away. In any case, we should see plenty of volatility given the indecision over the size of Wednesday’s cut, and uncertainty over whether markets treat a 50bp cut as a recessionary.