MAY 2019 FOMC MEETING

Backdrop

Given the more cautious stance taken by the US Federal Reserve (Fed) earlier this year and an unchanged macro and inflation picture, expectations ahead of the meeting were for an unchanged outcome. This is exactly what we were served with.

The statement was very much unchanged with patience clearly still on the agenda, mainly as a result of inflation running below 2%. The Fed acknowledged the fact that the labour market remains strong and that economic activity has risen at a solid rate. More interestingly, in a separate announcement, they lowered the interest on excess reserves (IOER) for the third time in a year from 2.4% to 2.35%. This is to address the recent upward pressure in the effective Fed funds rate.

The Fed left the door open to future adjustments depending on global economic and financial developments, and inflationary pressures.

Bottom line: Patience for the foreseeable future.

Market Impact

Following the release of the statement, market moves were overall limited. Equities rallied marginally, the US dollar was slightly better offered and rates continued to move lower. During the press conference however, these moves quickly reversed as Fed Chairman Jerome Powell said the Fed did not view a strong case for a rate move either way.

Shortly after the announcement, the US 10-year Treasury yield moved below 2.46%, the DXY index initially traded down 30bps and the S&P 500 was down 15bps. It is worth noting that liquidity was below normal as many countries in Europe and Latin America were out for Labor Day.

Asset Allocation Consequences

The Fed’s continued call for cautiousness and patience seems warranted at this stage, as global growth deceleration, which started at the beginning of 2018, is still fresh despite showing signs of stabilisation around potential growth levels over the last few months. Our proprietary US Growth Nowcaster is currently showing some consolidation around potential growth however, and we believe we are unlikely to see a significant reacceleration from here. We continue to be worried about Eurozone growth momentum and are monitoring the situation closely as our EU Growth Nowcaster continues to be in negative territory. Inflation no longer poses a risk, which is also one of the reasons why we believe central banks will continue to be patient, as demonstrated by the Fed.

The cautious and patient stance adopted by many central banks gave the market a strong boost this year and continues to be a non-negligible force. It is also interesting to note that the growth scenario priced in bonds is currently very different from equities. We remain long growth-orientated assets with hedges as we are conscious that growth concerns could return, especially in Europe. With monetary policy currently on hold in most major economies, we continue to favour carry strategies and Emerging Market FX.

However, we are conscious that the recent dovish turn among central banks is now much more in the price, valuations are high and the market has already experienced a tremendous start to the year, which makes downside protection warranted.

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