Fed: Wolf! Wolf! The wolf is chasing the sheep! – Société Générale

Market pricing of end-2024 Fed Funds fell from 4.66% (67bp below the current level) before the July labour market data were released, to 3.85% just before the (stronger) ISM services data were released. Jay Powell’s comments on Friday have taken end-year pricing back down to 4.2%, but the market remains doubtful they will cut by 50bp in September, Société Générale’s FX strategist Kit Juckes notes.

Probably, the US slowdown really has started

“The market is pricing rates at a little above 3% in 3 years’ time, not quite as low as it was at the start of the month. It’s pretty much the same level we saw in 1992, when inflation expectations were significantly higher. The speed of the decline, however, is inly justifiable if the wheels come off the US economy pretty spectacularly. Market participants got excited about rate cuts at the start of 2023 and the end of 2023.”

“In Chair Powell’s view, the key lies with the labour market, which he mentioned 20 times in his speech on Friday. But while the labour market is clearly loosening there’s still huge uncertainty about how much it will slow. On that basis, while I doubt the market-implied terminal rate will head back up much now, the front end of the rates curve has too many rate cuts priced in over the next 6 month, unless the economy slows pretty sharply.”

“For rates/equities/credit folks, the speed and full extent of the slowdown are very important, but for the FX market, after the dollar climbed so high, the mere fact of the slowdown will continue to see long dollar positions reduced. A slower/smaller slowdown would benefit Latin American currencies more than a deep recession would, for example, but the other G10 currencies will probably rise further against the dollar however soft the US and is, as long as there IS a landing.”