Opinions

Moving on from DOTS we found the FOMC statement razor focussed on weakness in employment over higher prices. FOMC statement says “Job gains have slowed, and the unemployment rate has edged up but remains low.”

We expect the Fed to hold rates steady for the second straight meeting and, given heightened uncertainty, provide limited guidance about the policy path ahead. The updated Summary of Economic Projections is likely to show a median expectation of two rate cuts this year, unchanged from December. We do expect a slightly hawkish signal via the SEP projections that show higher inflation, somewhat weaker growth, and an unchanged forecast for the unemployment rate this year. We expect the median 2025 GDP growth forecast will be revised down 30bp to 1.8% and the projection for core inflation to rise to 2.8% from previous 2.5%. The median unemployment rate projection should increase slightly to 4.4%. We now don’t expect a change in QT considering that the debt ceiling issue is on abeyance till 30th Sep as yesterday the Senate passed a Republican spending plan, averting a US government shutdown. The Trump administration seems to be willing to endure short-term pain as it tries to rebalance the US from a consumption-driven economy with a large trade deficit into a manufacturing powerhouse. Its strategy relies on deregulation, privatisation, a shrinking public sector, tariffs, and efforts to weaken the dollar. There is a growing risk that the administration’s policy experiment leads to much weaker growth, lower bond yields, wider credit spreads and weaker equity markets in the coming quarters. So, while the Trump put is not there at all, Fed by it’s dual mandate is bound to react if it’s employment mandate forces it to cut. We expect 2/3 NFP readings of <50k might be sufficient to push Fed for at least 3 rate cuts in REMCY25. Hence the Fed Put is definitely there just waiting to unfold. The Fed is likely to hold steady for now, but if downside risks to growth and employment outweigh inflationary pressures from tariffs, it may ultimately be forced into deeper rate cuts than what the March DOTS might show. We continue to remain bullish on long end USTs but are waiting for opportune levels to enter longs.

The RBA appears set to commence a gentle easing cycle on 18 February, with a 25bp rate cut, lowering the cash rate to 4.10%. However, we expect its guidance to appear cautious and at best neutral. We believe that we might see a total of 100 bps of cuts by end CY25 against the current 77 bps of cuts only being priced in currently. With latest CPI reading coming below estimates, RBA would gain sufficient confidence that inflation was moving back to its target band, and would, therefore, be willing to make monetary policy a little less restrictive. Global downside risks from higher US tariffs and tariff-related uncertainty adds to the case for a lower cash rate, at the margin. Given that RBA places more weight on quarterly CPI outcomes than the monthly CPI indicator, we think dovish guidance and a back-to-back rate cut in April is unlikely. March quarter CPI data will not become available until 30 April, making 20th May the next truly live meeting where we expect RBA to again cut by 25 bps. The remaining 50 bps cuts we see coming backended in H2CY25. We see terminal rate at 3.35% from current level of 4.35%. In the short term, we think risk-reward favours positioning for AUD upside against the USD as a play on Australia’s less vulnerable position on trade with the US, given that Australia runs a trade deficit with the US. We also believe China is likely to see more stimulus in the March NPC meeting hence AUD is a buy on dip for most of Q1CY25.

We expect the ECB to continue to cut on 30 January with another 25bp reduction in the policy rate to 2.75%. We expect the description of the policy stance to be largely unchanged vs December. The messaging will be consistent with further rate cuts: the policy stance will continue to be described as restrictive and the ECB will remain confident that inflation is on the right track. There will be no pre-determined path for policy and the terminal rate will be above/at/below neutral (our expectation of neutral is 1.75%-2%) depending on the data which the ECB will judge meeting-by-meeting. The main risk in January is that the tweaks to the description of the recent data lean a little hawkish relative to December (e.g., higher energy prices, domestic inflation unchanged). We expect a minimal EUR impact around the ECB meeting date, with slight upside risks: the market is already pricing two cuts for the next two meetings, and the ECB is unlikely to commit to more cuts beyond that right now, its potential caution could support the EUR slightly given positioning. But in medium term, we are bearish on Eurozone for multiple reasons: French political issues, German election results & above all continued weak economic growth. We have a view of EUR testing parity by H1CY25. ECB might need to provide all the monetary support it can by dipping below the neutral rate too and rates markets current projection of only 87 bps cut in CY25 is too optimistic.

We expect Chair Powell to deliver a neutral FOMC meeting on Wednesday and not substantially change the message of the hawkish December meeting. The solid December jobs report and Trump’s policy uncertainty will keep officials comfortable pausing rate cuts for now, but slower core CPI inflation means Powell might continue to guide towards further cuts this year. We see two rate cuts in entire CY25 (in H2 mostly) as we await Trump’s policies on tariffs. While till now Trump has sounded more conciliatory on China, we believe future is still uncertain even though the first week of President Trump’s second term did not yield any major economic policies. Recent labor data have reinforced the idea that downside risks to the labor market have diminished. The latest reading in the unemployment rate nearly rounded down to 4.0% and revisions to seasonal factors now show it never hit 4.3% last year. Inflation data have on balance been positive since the December FOMC meeting. For core PCE, we expect December to print at .21 bps MoM. We believe Fed officials would like to get through Q1CY25 inflation data without elevated prints and gain greater clarity around trade, tax and immigration policies to feel more confident inflation is truly on a sustainable trajectory to 2%, particularly given evidence of strong growth and a stabilizing labor market. Patience is key to Fed policy making at this point of time with significant policy uncertainty, a solid employment situation & a moderating inflation.

We had mentioned in our 20th Dec opinion piece ( https://macro-spectrum.com/opinion/a-dovish-boj-still-looks-set-for-a-jan25-hike-of-25-bps) that BOJ was likely to hike by 25 bps in it’s 24th Jan meeting. We now firmly believe this to be case. Not only the BOJ is more sure of Japanese economy's growth, it is more confident of the likely wage growth in this year's Shunto negotiations. The key to us was the 14th Jan speech by Deputy Governor Himino. In this speech Himino observed that various corporate surveys suggest that wage growth in FY2025 will be the same or higher than the previous year. Also, the report from the January 2025 meeting of BOJ branch general managers stated that there had been many reports about an increasingly wide range of companies in terms of sectors and company size understanding the need for sustained wage increases. We expect upward revisions to the inflation forecasts in light of higher crude & a depreciating JPY. We expect a total of 50 bps of hike in CY25 starting with the 1st hike of 25 bps in the 24th Jan meeting. We now expect USDJPY to test 150 soon if the 25-bps hike materialises in Jan meeting. View goes wrong if BOJ still waits & maintains status quo in it’s Jan meeting.