It's all about "Interpretation" .... which is just another way of saying that nobody really knows

ref :-  "Investors are mispricing Fed's next moves on rates, say Goldman and UBS" , The Financial Times, Markets and Investing

It's always fascinating to watch how different parties can examine the same piece of information and draw entirely different conclusions.

(NOTE No. 1 : Avoid tired old clichés about "that's what makes a market") .

Sometimes when opposing views seem to be expressed by different reporters in the same media outlet, we sometimes wonder whether that's just a healthy reflection of the range of opinions out there, or some kind of editorial oversight. We'll assume the former ....

On the front page of today's FT is a report on European Central Bank boss Mario Draghi's policy statement yesterday that stressed how the ECB stands "ready to use all the instruments that are in the toolbox" if the malaise in the export-driven manufacturing sector develops into a wider slowdown in European growth. These instruments could include a resumption of Quantitative Easing, the bond purchasing programme that only ceased at the turn of the year, and further rate cuts  --  the ECB's deposit rate is already at MINUS -0.4%, of course. Mr Draghi also committed the ECB to no rate hikes until mid - 2020 at the earliest, as opposed to the end of 2019.

Essentially , the tone of the article harks back to Mr Draghi's famous pledge of 2012 to do "whatever it takes" to preserve the Eurozone  --  and indeed, that's the theme of a fuller article in the FT's International Section. All pretty doveish, right ? So why is it that in the round-up of yesterday's market action we learn that the Euro RALLIED after the announcement, and bond yields also managed a brief rise ? The fact is that whilst growing economic concerns both inside and beyond Europe pushed Mr Draghi into adopting a more accommodative tone than he has used recently, he was not as dovish as some expected / hoped for .... and that's what counts when it comes to market reactions, of course. Investors seem a trifle underwhelmed by the ECB's TLTRO plans  --  another round of Targeted Long Term Refinancing Operations for banks, and were hoping for something more. They may well get it too, but not yet .... and it's a classic lesson in looking beyond the banner headlines.

(NOTE No. 2 : Mr Draghi's commitment NOT to raise rates until mid-2020 is an interesting one. He leaves the post of ECB president at the end of October and has tied the hands of his successor. That will be a bit awkward if conditions improve and his successor is of a hawkish bent .... current Bundesbank chief Jens Wiedmann say, or Dutch Central Bank president Klaas Knot. What's more, Mr Draghi stated that any monetary stimulus must be accompanied by fiscal measures .... something else that will not find too much support amongst the famously spending-shy hawks eyeing Mr Draghi's job).

And so to the Fed, and news that Goldman Sachs and UBS believe that a constant stream of pessimistic headlines about the future of global growth have led investors to exaggerate the extent to which the Fed will be cutting rates. You can see how that might happen .... the expectation is that sooner or later the destructive economic effects of the escalating trade conflict must impinge on the US' economy. This view is in contrast to the President's belief that Trade War is a zero-sum game, and that if everyone else loses then the US must be the winner, but even so, some of the biggest names are the most fearful about the harmful effects of what's going on and are therefore the most convinced about a very significant loosening of monetary policy.

Futures markets are now implying that the most likely scenario is one of three 25bp rate cuts by year-end  --  incredible when you remember that we were still in a tightening circle at the end of last year. Neither Goldman nor UBS would deny that some loosening is on the cards, but think that the fear of economic damage, and therefore the expectation of repeated rate cuts, is overdone.  The yield on 2yr US Treasury Notes, i.e. those at the short end most effected by adjustments to policy, has tumbled over 40bp  in a few weeks, the result of investors seeking the safety of government bonds and growing expectations of the number of rate cuts in the pipeline.

(NOTE No.3 : You've got to wonder how much of this belief in deeper rate cuts on the way can be attributed to investors faith in some kind of "Powell Put" (see Opinion by Gillian Tett in the FT). This, of course, refers to the (in)famous "Greenspan Put", with "Greenspan" being Fed Chairman Alan Greenspan and "Put" being a Put Option  --  something that protects investors from downside risk. Investors believed that they could buy equity markets with comparative impunity in the knowledge that Mr Greenspan would ride to their rescue with rate cuts every time that a major market correction was threatened. Broadly speaking they were right , too .... and thus Mr Greenspan laid down the conditions that fostered wild asset inflation and ultimately the Financial Crisis. In that light, whether current Fed Chair Jay Powell would consider similar action just to protect investors must be very far from certain.)

Anyway, Goldman see US GDP growth at over 2% this year, which is lower than might have been expected before the latest escalation in US-v-China / US-v-Europe / US-v-Mexico trade conflict but hardly disastrous. Meanwhile UBS have turned underweight in those 2yr Treasury Notes versus Cash. By the time most of you read this, we will have seen the latest US employment data for May, and if it's weak then no doubt there a lot more noise about deeper rate cuts. But there's always another view, and we suspect that Mr Powell and his committee will need a lot more convincing before they even contemplate the amount of policy loosening now being commonly talked about.