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Tribune News Network
Doha
Bond markets were particularly volatile in recent days, Qatar National Bank (QNB) has said in its latest weekly report.
“In fact, over the 72 hour period from July 30 to August 1, market expectations about the future path of US policy rates fluctuated significantly. We explain these movements by delving into the ebbs and flows of US Federal Reserve (Fed) policies and trade tensions,” the report said.
The initial movement in market expectations followed the July meeting of the Fed’s Federal Open Market Committee (FOMC), when policy rates were cut for the first time in more than 10 years.
The target for the fed funds rate was adjusted down by 25 basis points (bps) to 2-2.25 percent. The FOMC has also announced an early end of balance sheet normalization or quantitative tightening two months ahead of schedule. Official reasons for the actions included slowing global growth, trade policy uncertainty, muted inflation pressures and inflation expectations, and soft US manufacturing data.
Despite the Fed decision, the report said, markets have interpreted the official communication as ‘moderately hawkish’.
After the FOMC meeting, market confidence in aggressive rate cuts diminished with the implied probability of further fed funds rate cuts dropping materially. The probability of rate cuts in the upcoming FOMC meetings in September, October and December fell from 100 percent to 62.7 percent, 78.7 percent and 85.1 percent, respectively. As a result, the USD strengthened and the US yield curve inverted further.
Two factors have led to such changes in expectations of future policy rates. First, as actions speak louder than words, the FOMC cut rates by only 25bps instead of the 50bps that some of the more aggressive bond managers expected.
Second, the lingo used in both the official statement and the press conference was not supportive of an overly dovish Fed put. The rate cut was dubbed a “mid-cycle adjustment” rather than the beginning of an easing cycle.
References to future actions and the need to monitor incoming data were watered down. This was amplified by the perception that there is no consensus within the Fed about how to proceed in this juncture.
Several regional Fed governors opposed the latest rate cut. In our view, initial market responses to the FOMC meeting did not lead to a disorderly tightening in financial market conditions. This would have given the Fed more flexibility to calibrate policy in a data responsive way.
Doha
Bond markets were particularly volatile in recent days, Qatar National Bank (QNB) has said in its latest weekly report.
“In fact, over the 72 hour period from July 30 to August 1, market expectations about the future path of US policy rates fluctuated significantly. We explain these movements by delving into the ebbs and flows of US Federal Reserve (Fed) policies and trade tensions,” the report said.
The initial movement in market expectations followed the July meeting of the Fed’s Federal Open Market Committee (FOMC), when policy rates were cut for the first time in more than 10 years.
The target for the fed funds rate was adjusted down by 25 basis points (bps) to 2-2.25 percent. The FOMC has also announced an early end of balance sheet normalization or quantitative tightening two months ahead of schedule. Official reasons for the actions included slowing global growth, trade policy uncertainty, muted inflation pressures and inflation expectations, and soft US manufacturing data.
Despite the Fed decision, the report said, markets have interpreted the official communication as ‘moderately hawkish’.
After the FOMC meeting, market confidence in aggressive rate cuts diminished with the implied probability of further fed funds rate cuts dropping materially. The probability of rate cuts in the upcoming FOMC meetings in September, October and December fell from 100 percent to 62.7 percent, 78.7 percent and 85.1 percent, respectively. As a result, the USD strengthened and the US yield curve inverted further.
Two factors have led to such changes in expectations of future policy rates. First, as actions speak louder than words, the FOMC cut rates by only 25bps instead of the 50bps that some of the more aggressive bond managers expected.
Second, the lingo used in both the official statement and the press conference was not supportive of an overly dovish Fed put. The rate cut was dubbed a “mid-cycle adjustment” rather than the beginning of an easing cycle.
References to future actions and the need to monitor incoming data were watered down. This was amplified by the perception that there is no consensus within the Fed about how to proceed in this juncture.
Several regional Fed governors opposed the latest rate cut. In our view, initial market responses to the FOMC meeting did not lead to a disorderly tightening in financial market conditions. This would have given the Fed more flexibility to calibrate policy in a data responsive way.
