Central Bank Watch – We are approaching the point where the market is losing its composure
Markets at one point began to anticipate a risk of more than a 25 bps increase in September, and we have already seen early chatter about a rate cut from the Fed next week. This is the kind of “loss of composure” we see when position squaring takes precedence over common sense.
We are likely approaching the point where the squaring party triggered by USDJPY is starting to impact market pricing and sentiment in nonsensical ways, as deleveraging is ongoing, even if the dust has settled a little this afternoon.
Let’s take a step back and look at what we know ahead of the FOMC meeting next week and how the economy is evolving relative to the admittedly optimistic/hawkish central projections from the FOMC back in June.
Markets still price >2 cuts for the remainder of the year, which we largely disagree with.
Chart 1: Markets starting to chase more than 25 bps in September?
All it took for markets to unwind their macro-divergence trades was Powell confirming the beginning of a new cycle by hinting at a September rate cut in advance, coupled with some positioning squaring ahead of the vacation season. We’re now seeing the ramifications unfold, with positioning being squared across assets and USDJPY converging back towards fair values. But are we done talking about central banks here? Not really… The market is getting ahead of itself. Here is our FOMC/BoJ preview.
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