Federal Reserve's Emergency Rate Cut and Its Impact on Yields
In September, the Federal Reserve implemented an emergency 50 basis points (bps) rate cut. At the time, they described the US economy as being in good shape. However, just over a month later, the 2-year and 10-year US Treasury yields are both trading around 50bps higher, at 4.02% and 4.18% respectively. There is even market speculation that the latter could test 5% in the near future.
This raises questions about the Fed's decision-making process. If they were aware that yields would rise, why did they cut rates? If they were not, it brings into question their understanding of the market dynamics.
Continued Rate Cuts Amid Rising Inflation
Despite the rising yields, some voices within the Fed, such as Daly, see no reason to halt the rate cuts. They argue that as inflation falls, further cuts are necessary to guard against a weakening labor market. Others suggest that the next steps might involve a return to 25bps cuts, which could potentially see yields rise less.
Impact of the US Election and Trade Tariffs
The upcoming US election and the potential for a Trump win could also be contributing to the yield increase. Financial markets are focusing on trade and tariffs, with some suggesting that Harris should challenge Trump on these issues. However, the analysis of the impact of tariffs on the US economy has been criticized for being flawed and failing to make a compelling argument against them.
Geopolitical Tensions and Market Impact
In the Middle East, tensions are escalating. There are reports of possible retaliatory strikes by Israel on Iran, which could lead to further escalation and potentially impact oil prices. In addition, the decision by Moldova to start the EU accession process could increase EU-Russia tensions and have wider geopolitical implications.
BRICS Summit and Potential Impact on Global Markets
The annual IMF and World Bank meetings are currently taking place in Washington, D.C. At the same time, the BRICS summit is being held in Kazan, Russia. While there is no expectation of a BRICS FX alternative to the US dollar emerging, there could be progress towards Russia’s plans for a BRICS exchange for producers and consumers of almost half of global grains, known as 'BREAD-PEC'. This could potentially lead to a global bifurcation in key agricultural markets.
Bottom Line
The Federal Reserve's emergency rate cut and the subsequent rise in yields raise questions about the effectiveness of their monetary policy. The impact of the upcoming US election, trade tariffs, and escalating geopolitical tensions are all factors that could potentially influence market dynamics in the future. What are your thoughts on these developments? Do you agree with the analysis presented here? Feel free to share this article with your friends and join the discussion. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.
