Active is: Anticipating what’s ahead

Balancing exercise mandatory for the Fed

by Franck Dixmier | 17/06/2019
Dixmier FOMC

Summary

Markets are keenly awaiting the next monetary policy meeting of the US Federal Reserve, which will take place on 18 and 19 June.

Key takeaways

  • The Federal Open Market Committee meeting comes as the US Federal Reserve (Fed) is under constant pressure from the markets and the White House
  • Even if the Fed's next move should be a rate cut, at this stage it seems unlikely that this decision will be announced as early as 19 June
  • Market disappointment could lead to a rate correction, which should encourage investors to take longer duration exposure in their US bond portfolios

The escalation of trade tensions between the United States and China has caused investors to fear a sharp slowdown in global growth; equity market volatility has risen again; while inflation expectations have continued to fall, with the 5-year/5-year inflation swap rate falling to 2.03% in early June - despite a slight rebound in core inflation in April - and the Core Personal Consumption Expenditures rising from 1.5% in March to 1.6% in April. As a result, markets are now anticipating just over three 0.25% or 25bps rate cuts over the next 12 months, including a little more than two by the end of the year. In addition, political pressure is increasing, as President Trump wants to maintain economic activity at all costs.

Jerome Powell, the Fed President, will therefore have to engage in a balancing act: if the resilience of the US economy, which remains robust, does not provide him with an argument justifying a change in monetary policy, he should nevertheless indicate that the central bank is ready for a “Fed Put” if necessary to offset the negative effects of trade tensions.

This would prove it is listening to the message sent by the markets not to tighten financial conditions. In a speech delivered in Chicago on 4 June, Jerome Powell said he was closely monitoring the impact of the tensions and stood ready to act appropriately if necessary, thus opening the door to a rate cut without explicitly mentioning it.

It now seems very likely to us that the Fed's next move will be a rate cut, not an increase. However, we believe that the Fed will not take a decision at the 19 June meeting. There are several reasons for this:

  • The US economy is resilient, supported by household consumption, and the full employment target has been exceeded. The Fed needs more time and real data to adjust its forward guidance downwards, and this would need to include converging indicators confirming a real deterioration in activity.
  • The normalisation of monetary policy was put on hold after nine rate hikes, with Fed Fund rates fluctuating between 2.25% and 2.50%, from historically low levels. The central bank's room for manoeuvre is therefore limited: rate cuts will be a scarce resource, the timing of which must be particularly well gauged in order to guarantee maximum efficiency.
  • US Equity markets, despite volatility, are close to historical highs, and continue to experience one of the longest upward cycles in history.
  • Finally, Jerome Powell must avoid a monetary policy error at all costs: even if it is unlikely, the possibility that a favourable trade agreement between the United States and China will be reached cannot be excluded. This could revive the American economy and lead to increased inflation, and inflation anticipations.

Given high market expectations, a speech that is less dovish than expected should temporarily disappoint investors in both equities and bonds. We believe that any correction in US rates would provide an opportunity to take some duration in US bond portfolios.



Investing involves risk.  The value of an investment and the income from it will fluctuate and investors may not get back the principal invested.  Past performance is not indicative of future performance.   This is a marketing communication.  It is for informational purposes only.  This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication.  Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use.  The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

This material has not been reviewed by any regulatory authorities.   In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations. This communication's sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of his document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Panama, Peru, and Uruguay.

This document is being distributed by the following Allianz Global Investors companies:  Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors Distributors LLC, distributor registered with FINRA, is affiliated with Allianz Global Investors U.S. LLC;  Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG, licensed by FINMA (www.finma.ch) for distribution and by OAKBV (Oberaufsichtskommission berufliche Vorsorge) for asset management related to occupational pensions in Switzerland; Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association and Investment Trust Association, Japan];and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

874804

About the author

Franck Dixmier

Franck Dixmier

Global Head of Fixed Income, CIO Fixed Income Europe

Franck Dixmier is Global Head of Fixed Income and Chief Investment Officer (CIO) Fixed Income Europe, and a member of the Global Executive Committee at Allianz Global Investors.

Active is: Anticipating what’s ahead

The ECB is ready to take action

by Franck Dixmier | 17/06/2019
Dixmier FOMC

Summary

The ECB’s next meeting on 25 July is of major importance, and markets should welcome confirmation of its new forward guidance. We expect the central bank to reaffirm that it has the will to support growth and manage inflation, and the tools needed to take action.

Key takeaways

  • At the ECB’s next meeting, we expect confirmation of the statements Mario Draghi made in Sintra on 18 June: the central bank is ready to take all measures to support growth and move closer to its inflation target, and will likely provide new forward guidance
  • We do not expect any concrete action until the ECB’s September meeting, which should open a sequence of lower deposit rates followed by the launch of an asset-purchase programme at the end of the year
  • The official confirmation of this new forward guidance should be welcomed by the markets, and should help anchor rates at extremely low levels
  • We have entered an undeclared currency war