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The SA Daily 31 July 2019

US rate cut fully priced in

Shireen Darmalingam

  • US GDP growth slowed to 2.1% q/q in Q2:19 (the slowest since Q1:17). Still, this exceeded expectations of 1.8% q/q; GDP growth was 3.1% q/q in Q1:19. The positive contributors in Q2 were personal consumption expenditure, federal government spending, and state and local government spending. The negatives came from private inventory investment, exports, and residential and non-residential fixed investment.
  • The Federal Open Market Committee will announce the Fed’s rates decision tonight. Markets are fully pricing in a 25 bps rate cut; this would mark the first cut in a decade. Expectations of a more aggressive rate cut of 50 bps have receded this past week. The Fed nevertheless has to combat slow growth and trade tensions.
  • President Trump’s criticism of the Fed ahead continues apace, with him claiming that the Fed would “likely do very little to ease interest rates” and that “a cut of 25 bps would not be enough”.
  • We too foresee a 25 bps cut today, and one more cut of 25 bps by year-end in what would be a generally expected further step in monetary policy easing. The Fed tonight will therefore be closely watched for any indication of further cuts.

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