• We expect the Fed to maintain rates unchanged in the next week's meeting, as widely anticipated in the markets.
  • Markets will focus on how FOMC participants assess the need for later hikes. In June, 12 out of 18 'dots' looked for one more hike, but we doubt it will materialize.
  • Markets have bought into the 'higher for longer' narrative, and the consequent tightening in financial conditions limits the need for further hikes.

The Fed has made it clear it has the room to remain on hold for September, while keeping the door open for later hikes if needed. But the outlook beyond next week's Wednesday is everything but clear, as Q3 GDP Nowcast estimates range from St. Louis Fed's -0.3% all the way to Atlanta Fed's +4.9%, with only two weeks left of the quarter. In any case, markets have bought into the Fed's view of maintaining rates higher for longer, which is in stark contrast to the speculation seen 6M ago, when first cuts were being priced already for the next week's meeting.

Counter-intuitively, this reduces the need for hikes going forward, as financial conditions have tightened over the summer. Our in-house 'growth tax' measure (Chart 1, 6M change in financial conditions), is at the most restrictive level since the collapse of SVB, not least reflecting higher mortgage rates and stronger USD, but also higher oil prices. With real yields at the highest levels since the GFC, it only makes sense that the Fed is turning more cautious on growth, even if we see no imminent signs of rapid weakening.

Market prices in around four 25bp rate cuts for 2024, which would still leave monetary policy stance fairly restrictive in real terms. And as QT continues to provide passive tightening in 2024 as well, we think the nominal policy rate has already reached a sufficiently restrictive level. Further hikes could be justified, if the underlying growth backdrop is significantly stronger than we have anticipated, for example reflecting the past fiscal support to investments (see Research US, 22 August). But for now, our baseline GDP forecasts remain on the bearish side of the spectrum, +1.9% for 2023 and +0.6% for 2024.

With little need to pre-commit to any policy action, we expect Powell to deliver a balanced message, highlighting positive development in cooling labour demand and recovering supply, but underscoring that there is still ways to go before declaring victory over inflation.

Strong realized data likely warrants an upward revision to the GDP projections, but the main focus will be on the 'dots', and if some of the 12 participants calling for 5.50-5.75% terminal rate have reverted their call for another hike. Leading up to the blackout, only two out of 12 voters were in favour of holding rates steady from here, while three favoured hikes at a later stage, leaving majority of the voter views still unclear.

This leaves the door open for market volatility during the meeting. We expect long treasury yields to decline gradually over the coming months as the probability of further rate hikes is being priced out, cuts (expected to start in Q1 2024) are drawing closer and weaker US inflation/growth data is dampening long term market inflation expectations. We expect the 10Y UST yield to end the year at around 4%, and see EUR/USD at 1.06/1.03 in 6/12M.

Download the full report

This publication has been prepared by Danske Bank for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Bank's research analysts are not permitted to invest in securities under coverage in their research sector.
This publication is not intended for private customers in the UK or any person in the US. Danske Bank A/S is regulated by the FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange.
Copyright () Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.

Recommended Content


Recommended Content

Editors’ Picks

EUR/USD stays below 1.0700 after upbeat US PMI data

EUR/USD stays below 1.0700 after upbeat US PMI data

EUR/USD stays on the back foot and trades in negative territory below 1.0700 as the US Dollar benefits from upbeat data in the American session. S&P Global reported that the economic activity in the US private sector continued to expand at a robust pace in June.

EUR/USD News

GBP/USD drops to fresh multi-week low below 1.2650

GBP/USD drops to fresh multi-week low below 1.2650

GBP/USD remains under bearish pressure and trades at its lowest level since mid-May below 1.2650. The stronger-than-forecast Manufacturing and Services PMI data from the US helps the USD hold its ground and causes the pair to stretch lower.

GBP/USD News

Gold drops below $2,340 as US yields rebound

Gold drops below $2,340 as US yields rebound

Gold loses its traction and trades deep in the red below $2,340 in the second half of the day on Friday. The benchmark 10-year US Treasury bond yield pushes higher following the upbeat PMI data from the US, weighing on XAU/USD.

Gold News

Bitcoin retraces to crucial support

Bitcoin retraces to crucial support

Bitcoin price encounters resistance at weekly highs before retracing to seek support at a crucial level, while Ethereum and Ripple align closely with Bitcoin's movements, gearing up to surpass resistance barriers and embark on upward rallies.

Read more

Week ahead – US PCE inflation the highlight of a relatively light agenda

Week ahead – US PCE inflation the highlight of a relatively light agenda

Core PCE inflation to test bets of two Fed rate cuts in 2024. Yen awaits BoJ Summary of Opinions, Tokyo CPI. Canadian CPI data also enters the spotlight.

Read more

Majors

Cryptocurrencies

Signatures