Central banks to cushion the blow to confidence by easing monetary policy over the coming months - ABN AMRO

Bill Diviney, the senior economist at ABN AMRO, notes that the agreement to hold off on further tariffs while negotiations on a U.S.-China trade deal resume is a positive development, and there was scant detail on how (if at all) the differences between the two sides have been bridged since the last time talks broke down in early May.

• “We continue to think much of the damage from the trade war has been done in terms of the sharp fall in global business confidence. Given the unexpected twists and turns in the trade war so far, we think businesses will be reluctant to assume a wholesale resolution to the dispute in their investment plans. As a result, we expect business confidence to remain cautious in developed markets, and for investment to be weak over the coming quarters.
• Indeed, this was confirmed today by the US ISM manufacturing PMI, where the forward-looking new orders index fell to the lowest since end-2015. In China and other emerging markets – where the direct effects of tariffs are more significant – the removal of the imminent threat of tariff increases could be more of a support.
• As a result, we continue to expect central banks to cushion the blow to confidence by easing monetary policy over the coming months, starting with the Fed, which we expect to cut rates by 25bp at the 30-31 July FOMC. Having said that, the truce reduces the chances of a 50bp cut, though that was already looking unlikely following St Louis Fed president Bullard’s comments last week.
• OIS forwards now price in 31bp of cuts for July, down from 33bp on Friday, and as much as 37bp this time last week (i.e. a 25bp cut is fully priced, with 50bp 62% priced). For the ECB, we continue to expect two 10bp rate cuts in September and Q1, and the relaunch of asset purchases to be announced before the end of the year.”