'Surprised By US Fed Decision On Interest Rate Cuts': Geoff Dennis
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00:00 Do we have Jeff ready to join us?
00:02 Yeah.
00:03 Jeff, Dennis Independent Advisor Emerging Market Expert joins us.
00:08 Jeff, good morning.
00:09 Thank you very much for joining us.
00:11 Jeff, the three of us have been debating about what and how to make of what happened last
00:18 night.
00:19 First up, I guess, status quo, no changes on three rate cuts that's expected.
00:26 Some may argue about the commentary being dovish, but what I want to understand from
00:30 you if the economy is doing well and inflation is sticky, how does the street or analyst
00:36 or economist even expect a rate cut at this stage?
00:41 I couldn't agree more.
00:42 I had expected that the Fed would go from three rate cuts to two rate cuts at this meeting.
00:49 I'm very, very surprised that it didn't do that.
00:53 I think it's inconsistent, frankly, with the rise in the increased forecast for GDP growth,
01:01 which has gone up quite a bit since three months ago, and also a slightly higher inflation
01:08 forecast.
01:10 I think it's very surprising that they still went for three rate cuts.
01:15 I think the market reaction will tell you the market was surprised as well.
01:20 I don't know how they're going to fit three rate cuts in, because also you've got to consider
01:26 the timing of the rate cuts vis-a-vis the election.
01:30 The Fed will not want to start rate cuts just before the election or just after the election.
01:36 So it does imply they're going to have to start thinking about cutting rates in June
01:40 or July.
01:42 And that still seems to me to be quite early.
01:45 So I thought this was a big surprise today.
01:48 Juhi Chawla, Global Market Analyst, CNN.
01:49 Jeff, I know global markets seem to be very excited, and I'm assuming it's the no news
01:53 is good news in that sense.
01:55 Wall Street went up 400 points.
01:57 Asia looks good.
01:59 Crude is doing well.
02:01 Dollar is east of.
02:02 Bitcoin is rallying.
02:03 I mean, risk on, risk off, everything's moving up.
02:07 My concern is that if crude continues to stay elevated over the next couple of months, commodities
02:13 are beginning to move up as well, given what's happening in China.
02:18 Do you feel like three rate cuts today actually seem very unlikely for the rest of the calendar
02:22 year, because there are going to be so many unknowns which are going to catch markets
02:26 and regulators off guard?
02:28 You know, I agree.
02:29 I think the key thing for me about inflation is that inflation is coming down.
02:35 I focus more on the CPI.
02:38 Inflation has got stuck, I should say, on the headline CPI, just north of 3 percent.
02:44 The core is coming down, but very, very slowly.
02:46 OK, the core PCE is lower for sure, but there's just not enough progress there towards the
02:54 2 percent level to justify three rate cuts.
02:57 And then you are absolutely right.
02:58 You bring in a really important factor here, that oil prices have now broken out of their
03:03 recent trading range.
03:04 It was a very tight trading range, and that's going to push inflation up, not just in the
03:09 US, but of course around the world.
03:11 So I think what the Fed is probably doing, they're saying they trust that the economy
03:18 stays reasonably stable, does not accelerate or anything like that.
03:23 It could, of course, slow down.
03:25 And the progress on inflation continues, and therefore you get your three rate cuts.
03:29 But frankly, right now, as we sit here now, at the end of March, the case for a rate cut
03:35 in the US is very, very weak indeed.
03:37 So I'm just very surprised.
03:40 And you brought another factor in there to, if you like, underpin the surprise, and that
03:45 is the rise in oil prices.
03:47 Jeff, good morning.
03:49 Tamanna here.
03:50 You know, one of the reasons being talked about, and I want to get your take on this
03:55 and why rate cuts are still on the horizon, despite, for example, you saying that the
04:01 case for it is weak, is because you have elections in the US this year.
04:06 The anticipation of rate cuts has grown, and high rate cuts are actually hurting people
04:11 as well.
04:12 And do you think this is why the likelihood of rate cuts is very much there?
04:17 Maybe once they start, it won't be a quick reversal of stance, but definitely 75 basis
04:24 point cut is coming in.
04:25 Well, I published something earlier in the week where I said if you look at the election
04:31 calendar, and bizarrely, the November FOMC actually begins on the day of the election
04:38 and finishes the day after.
04:40 I think if you assume the Fed will not want to start cutting rates the meeting before
04:46 the election, and would also not want to start cutting rates the meeting after the election,
04:51 because one move would upset one side and the other move would upset the other side,
04:56 my best bet is they would have to start cutting rates in July, and then maybe they cut in
05:01 November or December.
05:04 But the politics makes this more complicated.
05:06 The politics for me makes this decision still about three rate cuts very difficult to justify,
05:15 frankly.
05:16 On the higher rates are hurting in certain parts of the economy, you're seeing a big
05:23 increase now, not a big increase, you're seeing some sort of increase in credit card delinquencies.
05:30 Obviously with bond yields having moved back above 4.3 to 4.35 recently, or come down on
05:35 the back of the Fed's meeting today, that is still holding the housing market back a
05:41 little bit.
05:42 But if you look at what the Fed has been talking about and their goals, and you look at how
05:48 decent the economy is, it's just hard for me to see that the monetary policy outlook
05:55 isn't changed from what it was three months ago.
05:58 And specifically, I'm not sure how they get three rate cuts in, given their goals between
06:05 now and the end of the year, given also the handicap to their flexibility that exists
06:11 because of the election.
06:13 I mean, having said that, there is no compulsion on the Fed to stick to three rate cuts this
06:21 year.
06:22 This is an inference from the dark plot.
06:25 The Fed has always said that they will watch the data and see what's happening next.
06:28 Just want to understand from you, Jeff, implications for emerging markets such as India?
06:34 Very very good, I think.
06:35 It's been a pretty dull year for emerging markets.
06:40 We're just above the zero line.
06:43 One of the things that's helping emerging markets to come back from being down about
06:48 five or six percent earlier in the year is China has stopped falling, and that's helpful.
06:54 You're seeing some big sell-offs in certain other markets, like mainly in Latin America.
07:01 But you've seen some very strong markets like Taiwan, for example.
07:04 Now India is outperforming this year.
07:07 It's up slightly in dollar-adjusted terms, which is good.
07:13 Based on my outlook for monetary policy and my outlook for the economy and inflation,
07:17 I think EM puts on about 10 percent on the year, and we're up now somewhere between one
07:23 and a half and two percent.
07:25 This was a good day for EM because you're getting the classic signs that pull people
07:30 back into EM, a weaker dollar, lower bond yields, risk assets doing well in the US.
07:37 So I think all of this is good for the emerging markets.
07:41 I still think India outperforms.
07:42 I don't worry about the election with respect to the Indian market because I think we know
07:47 probably what the outcome will be.
07:49 As I've said many times on this show, I think the issue for India is always valuations.
07:55 You need the growth to come through.
07:56 You need the earnings growth to come through.
07:59 You need to know that the inflation story is improving a little bit more.
08:03 But at the end of the day, India looks better to me than China, and India looks to me like
08:08 a small overweight.
08:09 And I think this news today is very, very good for emerging markets.
08:14 Rajiv Kumar, good evening to you.
08:18 Just one question, really.
08:20 Assuming that the Fed does what you're saying that might be difficult, which is three cuts,
08:24 plus the comment about QT as well coming in from Jerome Powell, would you believe that
08:30 risk assets would be higher between now and the end of the year if both of those things
08:35 happen?
08:36 Yes, for sure.
08:37 In other words, you're not going to get many days like you've had today, but the general
08:44 theme will be...
08:45 In other words, I've been saying to people that even if they ended up cutting the number
08:50 of rate cuts in their plan or in their dot plot from three to two, the narrative has
08:56 not changed or will not change.
08:59 That narrative is rates are at their peak, the economy is doing OK, inflation is coming
09:06 down, heading towards 2%, albeit a little bit more slowly than we'd like to see.
09:12 And ultimately, we don't really know when, but ultimately, they will slow down on the
09:18 QT process and stop the QT process.
09:21 I think if you assume with that, if you assume as I do, the dollar is overvalued, and after
09:29 being pretty resilient so far this year, starts to come off, you do see slightly lower bond
09:35 yields.
09:36 That is what I think gives you higher risk assets between now and the end of the year.
09:40 And that will include EM.
09:41 And this is why I'm very happy with my 10% call on emerging market equities in 2024.
09:47 Love having you, Jeff Dennis.
09:50 Your views on the Fed and the resultant impact on EMs always help.
09:54 Thanks so much for taking the time out and staying up for us.
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