The sharp increase in the unemployment rate has raised concerns about the gradual fed funds path, Standard Chartered analysts said in a Monday note.
The market has rapidly priced in 60 basis points of additional easing by January 2025, including 46 basis points over two days. While their baseline expectation was for two cuts by the end of 2024, there is now a risk that the Federal Reserve may move more quickly and aggressively than previously thought.
However, the analysts doubt that the Fed will implement cuts between meetings or opt for a sequence of 50 basis point cuts.
"Inter-meeting cuts are reserved for crisis situations in which there is risk that the economy and financial markets freeze up, in our view," they noted.
Analysts acknowledge that there may be some pain from the unwinding of FX carry trades, particularly those involving JPY or CNH shorts, but they consider this far from the impact of COVID-19 or great financial crises.
The so-called steepener trades have gained popularity in certain segments of the fixed income market, but concerns about the US economy have steepened yield curves outside the very front part.
"We doubt that equity markets 6% below all-time highs, retracing less than two months of gains, are enough to provoke dramatic policy action," Standard Chartered’s team wrote.
The analysts see the possibility of a 50 basis point cut in September but still seek confirmation from upcoming data. If subsequent reports confirm a decline as steep as the July labor data suggests, a sequence of sharp cuts is likely.
"The FOMC would likely ask itself how far policy rates are from where the data suggest they should be. It may not go the whole distance at one meeting, but would probably want to acknowledge that there was a gap that 25bps cuts would not reduce in a timely fashion."
While they are not yet convinced that a 50 basis point cut in September is necessary, a few more weak data releases could lead the Fed to conclude that 25 basis point cuts would be insufficient, Standard Chartered analysts noted.