“I am expecting a 25 basis point, not because the markets do not need more, it is just that an extreme move like a 50 basis point might really scare the markets and that is definitely not what the Federal Bank is trying to achieve,” says Farah Mourad, Senior Market Analyst, Equiti Group.
Now promising data we saw from the United States as far as retail sales is concerned, inflation is also at around 3%, jobless claims also the data was encouraging. Meanwhile very recently we have also seen Goldman Sachs also revising the risk of a US recession in the next year from 25% to 20%. Does that really confirm that Mr Powell will perhaps announce that much-awaited rate cut? Is that a given now?
Farah Mourad: It is a given. The markets are pricing 100% chance to have a rate cut by 25 basis points. So, now the question is actually and what the markets are trying to guess are we going to have a 25 basis point for September or 50 basis points. And I believe that the markets are expecting a dovish surprise, that is why we are seeing this rebound in the markets. We are seeing almost a V-shaped recovery in the markets. I am seeing hedge funds they are buying the dip in the tech stocks and I believe the data that came in, inflation first time in three years less than 3%. Consumption is good. Maybe they are misleading if you would like to discuss that as well. But overall, the scenario of a soft landing is the most probable scenario and that is what the markets are pricing in.
So, let me ask you once again are you expecting a 50 basis point move or lesser than that?
Farah Mourad: I am expecting a 25 basis point, not because the markets do not need more, it is just that an extreme move like a 50 basis point might really scare the markets and that is definitely not what the Federal Bank is trying to achieve. A balance between a strong market and less inflation that is the perfect scenario, so that is probably why we would not see a first rate cut that I would say aggressive or a 50 basis point I do not think it is possible. Even though if you notice today this drop on US dollar and expectation for the Fed minutes and Jerome Powell’s speech, I believe the markets are pricing a dovish surprise. I highly doubt it is the right time for it, but that is what the markets are pricing right now. But other than the rate cut possibility, what are the other big expectations given that an election is approaching and everybody is eyeing what policies will be there as part of the new government?
Farah Mourad: I mean we have this tendency to have the sideway movement, a bit of a cautious between the investors even though I think it is an optimistic cautious behaviour. But usually whoever wins, historically, we have seen stock markets rebounding after the election. Definitely there is different policy coming in. Sometimes the stock market would not prefer a Democrat for the first half of year after the election, but overall, over the year, the stock market always rebounds after election.But experts also say that there is a conjecture around what happens after the first rate cut happens and what will be the pace of additional rate cuts over the next several months as the Fed confronts both risks to inflation and of course employment as well.
Farah Mourad: I mean, inflation is dropping. As I said, first time we are seeing a percentage less than 3%. Expectation now is to have probably 100 basis points cut. And if that is right, then we need to see a 50 basis points somewhere between now and December. This is why the most probable scenario is to see 25 basis points each meeting, that is I would say a balanced scenario. A more dovish one would be probably a 25 basis point in September and then maybe in November or October we would see a 50 basis point cut. Let me also ask you, you of course speak about the inflation numbers that has come in below 3% and of course there is other data that has also come in as far as retail sector is concerned, so encouraging. But will it be right to say that the US economy is completely out of the woods as of now?
Farah Mourad: No, it is not really the case and that is probably what some speakers and the Fed they are trying to highlight. There are some signs that maybe the fundamental of the US market is not as healthy as it shows or as the recent data is showing, especially in consumption. If you want to check the credit limit, it is really being abused and that might probably be delayed to see how much maybe the US consumer is under pressure because we are using the credit card and maybe it is delaying to see how much consumption is being pressured by high inflation. Also, if we remember the last non-farm payrolls, they came really worse than expectation. Unemployment was above even what the federal bank wants. It was at 4.3% and what is scary with unemployment is when recession comes in, usually it starts with small jump in the percentage, but then it follows with a huge number of layoffs, so that is a scary thing also we need to check if we want to also discuss treasury yields curve.
Now promising data we saw from the United States as far as retail sales is concerned, inflation is also at around 3%, jobless claims also the data was encouraging. Meanwhile very recently we have also seen Goldman Sachs also revising the risk of a US recession in the next year from 25% to 20%. Does that really confirm that Mr Powell will perhaps announce that much-awaited rate cut? Is that a given now?
Farah Mourad: It is a given. The markets are pricing 100% chance to have a rate cut by 25 basis points. So, now the question is actually and what the markets are trying to guess are we going to have a 25 basis point for September or 50 basis points. And I believe that the markets are expecting a dovish surprise, that is why we are seeing this rebound in the markets. We are seeing almost a V-shaped recovery in the markets. I am seeing hedge funds they are buying the dip in the tech stocks and I believe the data that came in, inflation first time in three years less than 3%. Consumption is good. Maybe they are misleading if you would like to discuss that as well. But overall, the scenario of a soft landing is the most probable scenario and that is what the markets are pricing in.
So, let me ask you once again are you expecting a 50 basis point move or lesser than that?
Farah Mourad: I am expecting a 25 basis point, not because the markets do not need more, it is just that an extreme move like a 50 basis point might really scare the markets and that is definitely not what the Federal Bank is trying to achieve. A balance between a strong market and less inflation that is the perfect scenario, so that is probably why we would not see a first rate cut that I would say aggressive or a 50 basis point I do not think it is possible. Even though if you notice today this drop on US dollar and expectation for the Fed minutes and Jerome Powell’s speech, I believe the markets are pricing a dovish surprise. I highly doubt it is the right time for it, but that is what the markets are pricing right now. But other than the rate cut possibility, what are the other big expectations given that an election is approaching and everybody is eyeing what policies will be there as part of the new government?
Farah Mourad: I mean we have this tendency to have the sideway movement, a bit of a cautious between the investors even though I think it is an optimistic cautious behaviour. But usually whoever wins, historically, we have seen stock markets rebounding after the election. Definitely there is different policy coming in. Sometimes the stock market would not prefer a Democrat for the first half of year after the election, but overall, over the year, the stock market always rebounds after election.But experts also say that there is a conjecture around what happens after the first rate cut happens and what will be the pace of additional rate cuts over the next several months as the Fed confronts both risks to inflation and of course employment as well.
Farah Mourad: I mean, inflation is dropping. As I said, first time we are seeing a percentage less than 3%. Expectation now is to have probably 100 basis points cut. And if that is right, then we need to see a 50 basis points somewhere between now and December. This is why the most probable scenario is to see 25 basis points each meeting, that is I would say a balanced scenario. A more dovish one would be probably a 25 basis point in September and then maybe in November or October we would see a 50 basis point cut. Let me also ask you, you of course speak about the inflation numbers that has come in below 3% and of course there is other data that has also come in as far as retail sector is concerned, so encouraging. But will it be right to say that the US economy is completely out of the woods as of now?
Farah Mourad: No, it is not really the case and that is probably what some speakers and the Fed they are trying to highlight. There are some signs that maybe the fundamental of the US market is not as healthy as it shows or as the recent data is showing, especially in consumption. If you want to check the credit limit, it is really being abused and that might probably be delayed to see how much maybe the US consumer is under pressure because we are using the credit card and maybe it is delaying to see how much consumption is being pressured by high inflation. Also, if we remember the last non-farm payrolls, they came really worse than expectation. Unemployment was above even what the federal bank wants. It was at 4.3% and what is scary with unemployment is when recession comes in, usually it starts with small jump in the percentage, but then it follows with a huge number of layoffs, so that is a scary thing also we need to check if we want to also discuss treasury yields curve.
Let me get in a couple of questions on rising crude prices as well. In fact, we have been speaking to several experts, including Fereidun Fesharaki who stated that fundamentals indicate that oil prices are headed anywhere between $85 to $87 per barrel mark given the demand-supply situation and, of course, the two wars that are raging and there is escalation on both sides. What is your take on where crude is headed now?
Farah Mourad: Actually, I disagree with that. Of course, there is a premium risk of war, premium risk of interruption in the supply chain. But then if I want to check what is happening in the major demand or major economies around the globe, if I want to discuss the US, they are producing at an all-time high. If I want to check data coming from China, there is fear when it comes to demand. OPEC Plus, they discussed this fear. They changed their forecast. Too many other players in the oil market, they can jump in and they can fill the gap. So, I highly doubt there might be or these risks would really create this spike in prices. At the moment actually I believe otherwise, I think pressure might continue on oil prices.
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