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If you’ve been a regular reader of our weekly market notes this year, you’ll know that we are hyper-focused on central bank policy as the main driver of financial markets in 2019.
As such, this week will be a busy one as we’ll hear from most of the world’s major central banks as they meet to discuss and set monetary policy. And while many global central banks have limited options to announce further monetary stimulus in the wake of what is becoming a fragile global economic environment , the Federal Reserve can take more decisive action.
The famous January pivot by the Fed took the FOMC’s (Federal Open Market Committee) expectation for 2019 Fed Funds Rate increases from two to zero. Financial markets responded favorably. How they proceed moving forward will be equally as important. Futures markets are currently pricing in about 2.5 interest rate cuts by the end of the year. As of the last meeting, the Fed articulated the expectation for no rate cuts this year.
A rate cut this week appears unlikely as the fortunes of the economic outlook could change later this month with the G20 meeting and any breakthroughs on trade. In addition, while data coming in from the business sector is softening, the consumer appears healthy. Both retail sales and consumer confidence beat expectations in May.
Related: Corporate Bonds Need the Economy to Remain Healthy: Will it Happen?However, even without a rate cut this week, the Fed has powerful communication tools it can use to signal easiness ahead. Chairman Powell will give a post-meeting press conference, where he can assure markets that the FOMC stands ready to act. In addition, economic projection materials, which include the committee’s views on future growth, inflation, and more importantly, the level of the Fed Funds Rate, will also be released. We, and the markets, expect these items to signal rate cuts in the months ahead.
In times like these, asset pricing is dependent on the Fed and the markets agreeing on the future course of policy action. This week provides the Fed the opportunity to move closer to the markets. Anything less will likely create an environment similar to the fourth quarter of last year, where volatility spiked and risk assets declined.