Volatility May Rise as Prices Decipher the Fed
June 18, 2019
The economic data that are close by, i.e. coming out in the next several weeks, are not likely to reveal any dramatic weakness such that the U.S. Federal Reserve (Fed) would be compelled to cut rates. However, if one extrapolates the risks for potential economic weakness due to U.S.-China trade policies over the next several months and quarters, defined as the near-term from the Fed’s perspective, then cutting rates sooner to insure against anticipated future weakness may be an appropriate response. This presents a conflict between the market and the Fed, where the market is counting on sooner and quicker rate cuts, while the Fed may be inclined to cut later and more slowly. As such, volatility may rise as asset prices reconcile the timing and degree of policy support from the Fed.
Our Highest Conviction Views: We believe rates will remain low, U.S. consumer strength will continue, and there is low recession risk and thus low default risk.
Under the Radar Opportunities
Biggest Risk: A slowdown in China below a 6% threshold.
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