Will the Fed go large with its interest rate cut?

Will the Fed go large with its interest rate cut?

Will the Fed surprise with a large interest-rate cut?

On Wednesday the Federal Reserve convenes for a much-anticipated policy meeting.

In the weeks leading up to the big event, a debate has broken out not only among investors but between Fed officials themselves about what exactly the central bank should do to shore up economic growth and lift inflation to its 2 per cent target.

Market expectations have bounced around as a result, but now consensus has coalesced around a quarter-point cut to the Fed’s benchmark interest rate. Traders are pricing in an 81 per cent chance of such a move, with at least one more rate cut before year-end.

But in light of an increasingly worrying global growth backdrop and stubbornly low US inflation, some are still holding out hope that the Fed will go for a much more aggressive half-point cut this week — a move typically reserved for times of crisis.

That is the view taken by Morgan Stanley’s chief economist Ellen Zentner, who believes the Fed will continue to make assurances that it will “act as appropriate to sustain the expansion”. Steven Oh, head of fixed income at PineBridge Investments, agrees that a 0.5 percentage point cut is still on the table for Fed chairman Jay Powell in July, but stresses that is likely to be the end of the cutting cycle.

“There’s a case to provide a more impactful insurance cut right now and then pause to see how the economic data plays out,” he says. “[Half a point] is all that the market and economy require at the moment.”

Moreover, “the market will be disappointed by a [quarter point] cut”, Mr Oh added. Colby Smith

Will China’s Star Market continue to sparkle?

After a riotous start that saw shares climb as much as 520 per cent on the first day of trading, stocks listed on Shanghai’s new tech-focused Star market relaxed as the week progressed. By Friday the total market capitalisation of shares from the 25 Star listings stood at Rmb80.9bn ($11.8bn), down about Rmb4bn from Monday’s close but still up more than 118 per cent since the curtain went up on Monday.

The close on Friday also marked the end of a five-day period during which all 25 stocks were allowed to trade without any cap on price changes. The next stage for Star begins on Monday, when daily share price moves will be limited to 20 per cent in either direction.

That is double what is allowed on China’s two main stock exchanges in Shanghai and Shenzhen but still leaves the door open for a phenomenon common on those bourses when companies hit a rough patch: multiple consecutive days of shares falling by the maximum until they finally reach a level the market is comfortable with.

Some strategists have suggested valuations on the new board are due for a fall. Thomas Gatley, an analyst at research firm Gavekal, said Beijing was unlikely to become unnerved if prices came down gradually, but warned that policymakers could feel pressured to intervene if enough stocks dropped, day after day.

“The question is do we get a gradual grinding downwards,” Mr Gatley said. “I suspect big ‘down’ days are more likely when people see which way the movement is heading.” Hudson Lockett

Will the BoJ align policy with the US and Europe?

A significant strengthening in the value of the yen could soon become a problem for the Bank of Japan, which is meeting on Tuesday, a day before the Federal Reserve decides if it will embark on its first rate-cutting cycle since 2007. Falling US rates and persistent concerns about global growth could accelerate gains in Japan’s currency, potentially forcing policymakers to consider additional easing measures in response to dovish moves in other major economies.

Expectations for looser monetary policy in both the US and Europe are supporting risky assets and could boost emerging market currencies as central banks yet again flood markets with liquidity. But at the same time, concerns about global growth are prompting investors to buy haven assets such as the yen and the Swiss franc.

For now, analysts expect the BoJ to keep rates on hold and keep its guidance unchanged. But exchange rates will play a key role in determining how the Japanese central bank shapes policy in the second half of the year.

Nomura argues that the dollar weakening to below ¥105 from around ¥108 now could spur the BoJ to consider small but meaningful changes to its message. Japanese rate-setters slightly altered their guidance on policy direction just three months ago, promising to keep rates extremely low “at least through around spring 2020”, having previously committed to sticking to the policy for “an extended period of time”.

But for a full-blown change in the BoJ’s policy framework, including additional easing, Nomura strategists said the dollar would have to slump below ¥100. That is a level not seen for three years. Eva Szalay

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