Elliot Clarke, analyst at Westpac, suggests that it was very clear from recent Fed communications that, not only will a cut be delivered at the July meeting, but that another will follow before year end.

Key Quotes

“These cuts are best considered insurance and are justified by the expectation that current global uncertainties will persist for the foreseeable future – principally affecting business investment in the US.”

“To our and the FOMC’s expectation of two cuts by year end, the risk is that current uncertainties grow and/or their economic impact in the US spreads to the consumer via employment and wages. If that were to occur, then the FOMC would likely see a need to continue cutting into 2020, in line with the market’s four-cut expectation.”

“The risk of such an outcome is less than 50%, but not immaterial. With regards to inflation, the latest CPI print surprised to the high side. The 0.3% core inflation result for June was driven by a rebound in apparel and used vehicle prices, supporting the FOMC’s view that recent weakness will prove transitory.”

“The all-important shelter component also continued to rise at a robust pace. With annual core inflation at 2.1%yr and headline at 1.6%yr, there is no reason to fear inflation to the upside, but equally no real justification to believe disinflation will prove a lasting concern either.”

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