Well, enjoy the weekend because come Tuesday, it’s all hands on deck. September is a pivotal month will all manner of event risk, especially for rates and FX. You can view the full risk calendar here, but the key question of course is what does the Fed do?
They’ll have the benefit of seeing the ECB and BoE’s hand ahead of time, which means the FOMC will know the extent to which a hike would widen the DM policy divergence and thus potentially spark a destabilizing USD rally. They also have optionality thanks to the not-so-good, not-so-bad August NFP print. But this is all about knee-jerk reactions these days. 25bps here or there shouldn’t make a shred of difference in the real economy let alone reverberate across global markets. But we live in a new world. And the slightest hint of tightening has real repercussions if not for the real economy, then for, as Bloomberg’s Richard Breslow recently put it, “some credit trade whacked on in South East Asia, or the like.”
Against that backdrop consider the following from Morgan Stanley:
“A key argument for risk assets over the past few months, especially US credit, is that the combination of subpar growth, low rates, and easy liquidity is driving a massive reach for yield, and that inflows will remain strong as a result. At the very least, we believe a rate hike, and the increased possibility of more to come, would put a meaningful wrinkle into the yield-based technical argument for credit. Yes, even with a 25bp hike, rates would still be low. But we believe in the short-term, markets react to changes more than level. At the margin, monetary policy would be tightening vs. post-Brexit, where central banks temporarily panicked and liquidity conditions eased globally. As we show in Exhibit 1 in this cycle, selloffs in markets have consistently come when central bank liquidity became even modestly less easy. Why would this time be different?”
(Charts: Morgan Stanley)