1 to 7 July: Reality check: it’s time for the market to take the chill pill

The broad market was getting ready to enjoy the refreshing effects of a massive liquidity wave by the Federal Reserve up until the jobs report was released on Friday afternoon. According to the pricing implied by the Fed funds future, the broad market foresaw a cumulative 100bp worth of rate cuts over the course of the next 12 months, and even toyed with the thought of a greater-than-25bp rate cut in July. The actual June US (un)employment numbers, however, were at odds with the market’s overly bearish expectation. Our longstanding view was confirmed that the domestic consumption-led growth story in the US would last and serve as one of the most important growth engines this year. We maintain our view that real GDP growth in the US is not going to meaningfully slow below trend growth (if at all) over the course of the coming quarters.

In the aftermath of the jobs report release, the market has started to recalibrate its expectations for the Fed funds rate. On Monday morning, the pricing implied a 25bp cut with very high certainty in July and 50bp additional easing for the next 6-9 months. In conclusion: a release of liquidity vis-à-vis Fed funds rate cut could give the broad market a sugar rush in the short-term but would not have a long-lasting positive effect. We are of the view that strong economic growth is without question better news for the world economy than ‘lower for longer’ interest rates.

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