- The market has viewed the FOMC meeting as dovish, but our US economics team sees risks surrounding this ahead. Our strategy trades have broadly worked in the backdrop of a softer USD/lower US rates.
- In FX, our top trades remain long JPY/KRW (conviction 4/5), short S$NEER (conviction 4/5), and we increase the conviction on our short CNH basket (to 4/5). We exit our profitable long EUR/THB (lowered convictions on long EUR crosses) and enter a short THB/JPY position (conviction 3/5; target 5% to 4.20 by end-May).
- On rates, our top trade is long 10y IGB (conviction 4/5). We also hold receive Jun-IMM 2y India and 3y Korea (conviction 3/5). Separately, we convert pay Jun-IMM 3y HK IRS into a spread vs. 50% US (because the market views the FOMC as slightly dovish).
The FOMC was viewed as dovish by the market – leading to a lower USD, US rates, and stable equities. In particular, the FOMC left its median dots unchanged for 2025 (two 25bp rate cuts), lowered its 2025 GDP growth forecast to 1.7% (slightly more than our US economics team expected at 1.8%; in the December projections the forecast was 2.1%), and raised its core PCE forecast to 2.8% (less than our US economics team’s forecast of 3.0%; and compares with the FOMC’s December projection of 2.5%).
Powell at his press conference also downplayed some inflation risks, saying that it may be “appropriate sometimes to look through inflation if it’s going to go away quickly without action by us ... in the case of tariff inflation.” “If there’s an inflationary impulse that’s going to go away on its own, it’s not the right policy to tighten policy ...” Fed Chair Powell also said (on a question about the rise in Michigan inflation expectations) that this data point was “an outlier” and “in no way did I place a huge weight on it.”
On growth, Powell suggested that the economic backdrop was stable despite the weak survey data, but there was some suggestion that there could be a policy shift if the hard US economic data weakened notably (Powell highlighted more than once a focus on hard data). Powell noted that “the relationship between survey data and actual economic data hasn’t been very tight ... we will be watching very carefully for signs of weakness in the real data.” Powell even said that “the economy ... seems to be healthy” and “labor market conditions are solid.”
Despite the overnight developments, our US economics team maintains its view that the Fed will not cut in 2025. Our US economics team believes the FOMC is unlikely to deliver rate cuts while inflation is elevated, and if the economy evolves along the stagflationary path in the SEP table. We think this view suggests that there is some risk for markets because of the gap between our US economics team’s view and market pricing (Dec 2025 Fed Funds pricing is now pricing in 66bp of cuts from around 60bp of cuts before the FOMC meeting).
