All Eyes On September

How do fixed income investors hedge their risks as we await the FED decision? With market’s largely pricing in a September move, portfolios now must consider how to hedge risks in the event the FED remains on hold, or if the FED cuts but signals that the cut was not the start of a range of broad cuts.

• Overnight comments from Bill Dudley occupied headlines as he stated that he has changed his mind and that the FED should cut at the end July meeting. He points out that whilst wealthy households continue to consume thanks to buoyant asset prices yet the rest of households have generally depleted any one off transfers from the COVID period and are feeling the pinch with higher interest rates. He goes on to say that the household employment survey showed just 195,000 jobs added over the last 12 months and that the three month employment rate at 0.43 is only marginally below the 0.5 threshold. However, he concedes that at 2.6% the CPI is still above the Central Bank’s objective and that the significance of June’s number has increased given what markets have priced in.
• In light of this overnight we assessed comments by voting board members between May to July to understand what obstacles remain in terms of them being open to a cut.
  
• John Williams: whilst inflation is improving, is not ready to see rate cuts yet
• Thomas Barkin: need more edge off demand, before rate cuts
• Michael Barr: inflation data in the first few months of the year has been disappointing, tight policy needs more time
• Raphael Bostic: not past the point of worry about inflation
• Michelle Bowman: willing to hike if needed, but inflation will fall if rates are held steady
• Lisa Cook: inflation should continue to fall without a significant rise in the unemployment rate
• Mary Daley: inflation data is good, but we are not there yet.

From a fixed income portfolio positioning perspective, with much already priced in, the risks now are skewed towards no change. Inflation has a habit of being sticky and whilst the current trajectory is good, there is still some work to be done to achieve inflation goals and lets not forget in 2023 when a moderation in inflation was reversed and quickly proved to be transitory.

What we could see in September is in lieu of a cut, the FED altering their language such that they are open to the idea. This however may not satisfy markets and those positioned for a cut may need to rethink.