Wall Street’s Fed frenzy might not turn out how investors expect.
That’s at least according to Michael Schumacher, global head of rate strategy and managing director at Wells Fargo Securities, who said investors may find themselves disappointed by the Fed’s next move.
Many on the Street expect the U.S. central bank to slash its benchmark interest rate at the next Federal Open Market Committee meeting in late July in response to weakening economic data domestically and around the globe. The CME’s FedWatch tool currently shows traders pricing in a 100% chance of a July cut.
But what the stock market is pricing in with regards to Fed policy might be too aggressive, Schumacher told CNBC’s “Futures Now” on Thursday.
“We think they’ll come in and do two moves, so 50 basis points total [worth of cuts]. The market’s priced for something like 65 or 70 basis points,” Schumacher said. “So, in our view, at least at Wells Fargo, we think the Fed is, in some strange way, going to disappoint the market by not [cutting] as much as it already anticipates.”
Schumacher’s remarks came as Fed Chair Jerome Powell delivered what the strategist saw as “very dovish” comments in a two-day testimony to Congress. In it, Powell said macroeconomic “crosscurrents” including trade tensions and global growth worries were weighing on U.S. economic activity, and that the central bank would “act as appropriate” in response.
“He wants to cut,” Schumacher said, adding that the constructive U.S. consumer price data that were released early Thursday didn’t change the view of the chairman, who had likely seen the data before his testimony.
And, if the Fed decides to go through with a cut, U.S. 10-year Treasury yields could also see some counterintuitive moves, said the strategist, whose year-end target for the 10-year yield is 2.30%. On Friday, it rose to 2.13%.
“We think, in sort of a perverse way, that yields actually go up,” he said Thursday. “Typically, you might say, ‘Well, hey, if the Fed is about to cut, shouldn’t you get a big rally in bonds?’ The answer is yes, but we’ve already had it. There’s been a tremendous rally since November. We think it’s about done.”
But not everyone was on board with the idea of an imminent rate cut.
“Nobody still has convinced me that [Powell]’s going to act, and I don’t think he’s going to,” Anthony Grisanti, founder and president of GRZ Energy, said in the same “Futures Now” segment. “I don’t think he’s going to cut rates at the end of the month.”
Grisanti, who has traded futures for decades, said that between the still-healthy U.S. economic data, the prospects for a U.S.-China trade deal and the pressure Powell has received from President Donald Trump, a cut still seems unlikely.
“If we do get a trade deal, … he’s going to have to totally reverse course and then he loses all credibility whatsoever. And I also think that if he cuts rates, he actually looks like he’s under Trump’s thumb,” the trader said. “So, I think he’s going to look at this situation very carefully. There’s a couple more data points that have to come out.”
U.S. Treasury yields hit a one-month high on Friday after June’s consumer price index topped expectations for inflation.