Nomura: The Fed Will Go Large; Expect A 50bp Cut Out Of The Gate… And Soon
it may seem morbid, if not grotesque, to discuss the Fed cutting rates on the day when the S&P just hit a new all time high, but as a result of the previously discussed US bank liquidity and dollar shortage thesis, now also espoused by JPMorgan, and the coincident “funding-squeeze” dynamic, which as we have shown over the past week has expressed itself via the much-discussed “Fed Funds (Effective) trading through IOER” phenomenon…
… this is precisely the topic of the latest note from Nomura’s Charlie McElligott who writes this morning that with the Fed increasingly concerned about what even the big banks admit is a funding shortage in the US banking system (ironically enough, with over $1.4 trillion in excess reserves still sloshing in the system), Powell may have no choice but to cut rates aggressively, slash the IOER rate – perhaps as soon as this week – and eventually resume QE.
As if to validate McElligott’s point, amid increasing buzz of an imminent rate cut, the dollar keeps rising, and instead of tracking rate cut odds, which are now back to cycle highs, is instead tracking the excess EFF over IOER tick for tick as the clearest indicator of what is now perceived as a widespread liquidity shortage, and in doing so is escalating the recent turmoil across EMFX, as the US Dollar breaks out to fresh highs despite Friday’s worse than expected (below the surface) GDP print.
As discussed over the weekend, McElligott reminds readers that there is now “again a mounting belief in the market for a Fed “technical” IOER cut at some point into the Summer” –
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