• Video
  • The Bar Is High for the Fed to Cut From Here | Markets in 3 Minutes

The Bar Is High for the Fed to Cut From Here | Markets in 3 Minutes

Show Transcript
Bloomberg Dec 23, 2024 21:18 · 9527 Views

Guy Johnson, Tom Mackenzie and Ven Ram break down today's key themes for analysts and investors on "Bloomberg: The Opening Trade."

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more

Transcript

  • 00:00 What do you read into the PCE data?
  • 00:02 What does it really mean for the Fed
  • 00:05 morning guy?
  • 00:06 I don't think it means too much for the Fed.
  • 00:08 I think as you said, it's all marginal.
  • 00:10 You look, I mean, the 2.8% print was softer than what the markets were expecting, but it's not going to move the needle very much for the Fed.
  • 00:17 Why do I say that?
  • 00:19 the Fed has penciled in a core PCE of 2 1/2 percent for 2025
  • 00:23 S and in the past 2-3 months
  • 00:26 core PCE has sticked higher from successively from 2.62.72.8.
  • 00:30 So this is not making a case, an argument for the Fed to be cutting rates.
  • 00:36 If you take the core PCE at 2.8% and a neutral rate of 125 to 150,
  • 00:42 the Fed itself has penciled in a neutral rate of 1%, mind you.
  • 00:46 So I'm thinking it's slightly higher than that, say to one 25150.
  • 00:50 And if you tack the tone to the core PCE, what you get is a rate of about 4343440 thereabouts.
  • 00:57 And that's where the Fed is right now.
  • 00:59 So there really isn't a case for the Fed to be cutting rates at this point.
  • 01:03 And let's go PCE falls persuasively.
  • 01:06 And that persuasive is missing from the document yet, Guy.
  • 01:11 Then when we when we look at next year, I mean we're we're kind of working through some of the key themes that that could that could kind of work through the markets in 2025.
  • 01:18 Is central bank divergent going to be the story of 2025 as we look at over
  • 01:23 100 basis points being priced in, in terms of cuts the ECB versus what 30
  • 01:27 for the Fed and you have pointed to the caution around that projection
  • 01:31 as well.
  • 01:32 Is that the story or markets mispricing the ECB?
  • 01:36 I think that the markets are completely mispricing the ECB, Tom,
  • 01:39 because let's rewind the tape back at the end of 2023.
  • 01:43 This time last year,
  • 01:45 the markets were thinking 7 rate cuts from the ECB.
  • 01:47 This year, what did we get?
  • 01:49 We got 4.
  • 01:50 Next year, they're thinking probably 5:00 to 6:00, but I'm thinking maybe 2 to 3 and that's it.
  • 01:56 Look, I mean the Irish central bank Speaker
  • 01:59 and Mcclouf, the
  • 02:00 the central bank Governor Mcclouf has just remarked to the FD that
  • 02:05 PE people shouldn't start factoring in rate cards below the neutral rate.
  • 02:09 And everyone's idea of the neutral rate, if you ask the any ECB officials, it will range from 2:00 to 2:50.
  • 02:15 So the idea that the ECB is going to go below 2%,
  • 02:19 a lot lower than 2%, it's just not founded, well founded.
  • 02:22 OK, there are a lot of risk factors looming on the ECB horizon, but the ECB is not going to cut rates
  • 02:28 if you below neutral,
  • 02:31 if you believe McClure and you believe that actually that is ultimately where the where the ECB is going to stop.
  • 02:35 Doesn't that imply that actually maybe the dollar is getting a little choppy here?
  • 02:41 Well, I do think that the dollar is going to be a bit bid guy, because, you know, there's there's this divergent in the usus exceptionalism, right?
  • 02:49 the Fed as as we just made the case, is not going to be persuaded easily to cut rates.
  • 02:54 The ECB is going to cut rates twice, probably thrice.
  • 02:57 And therefore, I think
  • 02:59 that
  • 02:59 I think that the ECB will be
  • 03:01 the euro will be offered and therefore the dollar will be kind of bid for the foreseeable future.
  • 03:07 And mind you, the yen is also
  • 03:09 on the back foot.