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On the Wings of the Doves?

31 July 2019 by jbchevrel

Most CDS kept range-bound today, ahead of the FOMC decision and Chair Powell’s press conference. Long-term US rates are also consistently stuck in [202.5,205]. Trump’s headlines yesterday stating that he wants to see a large cut (as in more than 25bp) and a balance sheet runoff stop (QT stop) were nothing new, so it didn’t get much echo in our market. Two weeks ago, a surprisingly dovish-sounding NY Fed President Williams had made some bet on 50bp cut, but the evidence that since last FOMC domestic data have been solid and the fact that some members are still against a rate cut altogether make a 50bp cut look less likely, although not impossible. $ OIS pricing has thus fluctuated below 25bp and 30bp for this meeting, asserting that a double-cut is more likely than no cut at all. Beyond the question of the rate cut ‘size’, the prospects for an early balance sheet runoff stop and the guidance on whether this is not a one-off will be key. In the less likely event of the latter, we would see the market widen, following a decent bear flattening in the $ front end. That would mean back to full data-dependency mode. But the most likely guidance will be for other cuts, starting with one at September meeting, consistently with market pricing. That would reassert the next steps for the Fed to ‘compete’ with ECB (and BoJ) as far as easing is concerned. The CIS market also seemingly anticipates that scenario, as the CDX IG has gained back some ground over the iTraxx Main. The CDX is now back to less than 2bp cheap to Main versus 4bp earlier this week. The DTCC data relating non-dealer positioning as of last week shows that clients, over the week, have increased their long risk exposure via CDX IG (by c$3b) while they have notably reduced their long risk exposure through iTraxx Main (by c$7b). Anecdotally, as far as the data released today, while the ADP survey came broadly in line with expectation (156k vs 150k BBG consensus), the ECI missed (0.6% vs 0.7% BBG consensus) and the MNI Chicago PMI missed by a landslide (44 vs 51 BBG consensus), confirming rumors that it would print sub 50 this AM.