PGIM Fixed Income: Kommentar zur US-Notenbanksitzung

Market Relief Rally on Fed Stabilization 

Yesterday’s Fed meeting brought little in terms of new information, except perhaps the one thing markets value most: less uncertainty. The key ingredients to the Fed's messaging came in two forms: the dot plot, and the Chairman's comments in/at the press conference (* explanation re: dot plot). The dot plot showed a subtle convergence/less dispersion among meeting participants' expectations/views on the future path of the funds rate, and a slight downward/dovish bias relative to the prior projections. Importantly, yesterday’s Fed projections confirmed the 'on hold' expectation through 2020, moving the Fed's projections closer to market expectations for one rate cut. Additionally, the Chairman's comments also signalled an 'on hold' outlook over the near to intermediate term, with, if anything, a lower threshold for cuts rather than hikes. This ongoing de-emphasizing of the long-term projections is an important palliative for market participants given that the Fed's projections beyond 2020 continue to show the preponderance of participants expecting rates to rise. As a result, the Chairman's avoidance of unsettling comments, such as the suggestion in an earlier 2019 press conference that this year's rate cuts were simply a 'mid-course correction,' helped to reassure market participants that the Fed intends, all else equal, to remain on hold for some time.

For markets buffeted not only by the usual vagaries and uncertainties of the economic data, but by heightened political risks as well—-most notably in the form of trade tensions——a soothing Fed supported both risk products, such as stocks and corporate bonds, as well as Treasury bonds, which all maintained, or added to, gains from earlier in the day. Interestingly, the biggest market move was in currencies where the Fed announcement spurred diversification flows out of the safe haven U.S. dollar into other world currencies, driving a solid rise in a range of world currencies versus the U.S. dollar. 

Looking ahead, over the near to intermediate term, we continue to see the generally moderate economic backdrop coupled with accommodative policy from the major central banks as being market supportive as investors continue their search for higher returns and yields. However, investors will remain vigilant, not only in terms of monitoring the economic trajectory, but also from the basis of inter- and intra-country political risks, which have played a more prominent role in recent market movements.