Is a 25bp rate cut by U.S. Fed bearish? - Westpac

Analysts at Westpac note that this week’s FOMC outcome will be the key to directional impetus this week, and they see a 25bp rate cut as perhaps sparking a slight disappointment trade, but the medium-term effects will be minimal.

• “Focusing on the 10yr bond yield, we have been in a broad-sideways range for a number of weeks and it is difficult to foresee what combination of rate cuts and guidance will see the recent range breached significantly. Obviously a 50bp rate cut would do the trick, but even then an extended rally would need to be supported by the belief that the Fed was signaling a deeper global and domestic growth slowdown, such that the market was convinced that magnitude of the rate cut was less pre-emptive and more dovish in term of the forward outlook for the economy.
• Downside surprises have slowed in recent weeks, while the Atlanta GDP Now appears to have also bottomed, so we would be surprised if a more bearish economy outlook than was already in the price could evolve.
• From a positioning point of view CFTC data shows that speculative positioning remains short. Indeed current positioning is just of the most short the 10yr futures the specs have been since Q3 2018. Whether that will limit any sell-offs this week is up for debate, however, we think it is more evidence that the current US 10yr range remains intact.”