Anders Faergemann

Welcome to this PineBridge Podcast, where we will be discussing data reliability, the Fed outlook, and how the combination of those two topics will affect our rates and currency strategies. I'm Anders Faergemann, Head of Global Sovereigns and Economics. With me is Hani Redha, Head of Strategy and Research for Global Multi-Asset. We've just concluded our strategy meetings for the month. We affirmed our soft-landing scenario, providing a “Goldilocks” environment in the market for credit and risk assets. Still, there are some snakes in the grass, and whilst markets are calm and volatility low at the minute, we've lots to discuss. So, Hani, what's your assessment of the current themes? We've yet again seen some significant data revisions reminding us of last year's growth scare. How does this affect your assessment of the economy? 

Hani Redha 

Thanks. Anders, yes, global macro is a pretty tough gig at the best of times, and then we throw in massive revisions to the data to make it even more interesting for all of us, and this does remind me of last summer, where we were talking about “data torture”. 

Certainly, it feels that way. It's hard enough trying to assess the data and forecast, let alone when you can't even trust the data itself. So yeah, we did have some very significant revisions to the payroll data in the US and we think that's fairly significant in terms of assessing how strong or how robust growth was coming into this quarter, as well as further detail around even the GDP numbers, all of which seems to signal to us that growth was a little less robust than we initially thought, and there is definitely quite significant slowing happening in the US economy as we see it right now. 

One measure that we've been focused on, which tries to look through a lot of the trade data noise, because of tariffs and trade policy shifts and a lot uncertainty around that, so we want to put aside the inventories and import export data and just really focus on the core of what's going on domestically in the US in terms of consumption and investment, and so final sales to private domestic purchases is a good measure to keep in mind in times like this. 

And what we've seen over the last few quarters is that we've decelerated from close to three and a half percent real growth to closer to 1% - 1.2% in the most recent quarter. So that's a pretty substantial deceleration over the last 12 months or so, which we are taking note of. Now we do think that the most recent data points are probably overstating the degree of deceleration because of the almost sudden stop effect of the April announcements that probably led companies to freeze their hiring decisions, at least to see how things were going to play out. 

But of course, since then, we know that some of those policies were diluted and spread over time, and we have seen a recovery of confidence. And so, we think this deceleration is probably overstating things to some extent, but it's very clear that we have seen deceleration, and it's going to be a bumpier ride for the remainder of this year. That all said, we are actually fairly constructive on how things look, particularly into, let's say, the latter half of next year. 

So 2026, we think, is where we see some difference of opinion between what we've been discussing internally and what we're hearing and seeing priced into markets right now, but maybe you can summarize some of our discussions Anders as part of the strategy meetings, and focusing on how this will affect what the Fed should do versus what they will do.

Anders Faergemann

Yeah, exactly. We had some great discussions in our strategy meetings around what the Fed should do versus what the Fed will do. But initially there was a lot of talk about, “will they won't they” cut in September. But as you said Hani, we tried to steer the conversation towards 2026 and 2027 with the aim to draw conclusions on the two-year rate. In the end, we make only minor adjustments to our rates forecasts with the affirmation of our soft landing scenario, with a slight tilt, as you say, towards gross deceleration, we added one more Fed cut to our 12 month forecast, so we now have four cuts, and the policy rate ending up at three and a half percent. 

In contrast, we debated whether to remove the final cut from our ECB forecast, but on reflection, we kept it intact. 

As the ECB may look to the Fed for direction, as I said, it's worth highlighting the debate and the degree of skepticism around the need for the Fed to cut interest rates in September as services inflation came in a bit hot in the last data point. But I think Jerome Powell’s speech on Friday at Jackson Hole may have addressed some of those stats. He went to great pains in highlighting the asymmetry in the Fed's assessment of its dual mandate, and I do believe that Powell will keep emphasizing the need to protect employment and possibly ignore any short-term inflation overshoots. 

So, whilst we did and we love debating the whole “will they - won't they” scenario, we are more interested in answering the question around what the Fed should do, versus what the Fed will do. And let's say we look at a timeframe of 18 to 24 months. As you know, we, in our assessment of the rate outlook, take into account available data, trends and revisions and assign probabilities to achieving our global macro scenarios. 

And we are coming into a period where we need to recalibrate our global macro scenarios for 2026 but in the current conditions, as you highlight, we're confident the Fed will achieve a soft landing of modest growth and anchored inflation expectations, allowing gradual easing of monetary policy the next 12 months. 

This is our base case. Obviously, there are some risks linked to inflation, the composition of the FMC, but we refer to those as “known unknowns”. We've also done some work on tariffs, and we need to do some more work on immigration cuts and how that may influence the economy. But the initial takeaway is that the worst is probably behind us, and so the rate of change is manageable. 

That means we're looking at more stability into 2026. I think this is where there might be a bit out of consensus, and it may sound a bit counterintuitive in terms of all the uncertainty we've seen the last four months, however, and above all, we expect looser monetary policy and looser fiscal conditions to spark a mild recovery in the US economy, yet growth will remain moderate. 

So, this will enable the Fed to cut once per quarter, a bit more front loaded than we originally thought. But then pause and reassess next summer, as you say, when we are looking for perhaps stronger growth into the second half of 2026. 

So in conclusion, we like the two-year part of the curve in the short term, which can drag the rest of the curve lower in a sort of parallel shift, but we're mindful that the Fed is likely to cut less than what's priced by the market, so the trade has a clear use by date warning. And then obviously there's the whole issue around the curve, with the positive outlook hinging on the inflation outlook and, perhaps more importantly, inflation expectations. 

So, in our base case, we think inflation expectations will remain anchored, but there is that risk, or the Fed could overdo the easing, which again could lead to a steeper curve, irrespectively the 10 year rate can easily hit our 4% target or forecast over a 12 month period. 

But with that, Hani, maybe I can bring you in and ask for your opinion on the two-year outlook for rates, but perhaps more interestingly, link that to our dollar view and what impact it may have on the dollar?

Hani Redha

Sure, Anders and yes, I think there's clear consensus and expectation of ongoing, medium or even longer term dollar weakness, and we have seen quite a bit of dollar weakness so far. It makes sense to us when we focus on two-year yield differentials, it’s still the best guide for where the dollar should be heading, outside of very unusual conditions. 

In April itself, we have seen the dollar recouple with rate differentials as a driver, so the world starts to make sense again, which is a good thing, and what it indicates to us when we think about the outlook for growth and Fed Funds, as well as what the ECB and the BOE are doing among other central banks, we don't see significant rate differentials moving against the dollar any further. 

So, the big moves have already happened because of the big change in Fed pricing that we've seen. Less so about the other central banks, but much more the dollar being driven by expectations of significant cuts from the Fed. And as you said, you know we agree with that over the next few quarters. But looking beyond that, the difference of opinion we have with the market seems to be that we think that the rate of change will actually start to improve as we go into the second half of next year, both because monetary policy goes from being a headwind with lags to being a tailwind with lags as well as a fiscal policy, which is currently contracting because of the tariff effect, but that actually leads to a tighter fiscal policy. 

But as that impulse fades, we'll have the Big, Beautiful Bill kicking in, which should actually loosen fiscal policy. So, we're going into an environment where both monetary and fiscal will be easing slightly next year, and markets are about rate of change. They're about better or worse outcomes, not about good or bad outcomes, and so that drives us to expect the dollar to find its footing in the second half, and that's what we're very focused on, as opposed to the market obsessing about September or not September. 

So, with that in mind, we think the big swings against the dollar are largely behind us. We may see some further near term weakness as the market digests the likely September cut and potentially plays around with the idea of even more cuts to come. But we are advising that weakness in the dollar, dollar dips should be bought from here. But with that, maybe you can conclude for us Anders and summarize our recommendations.

Anders Faergemann

So thanks, Hani. Buy dollars on dips, sounds like a plan. Thank you, that's all very clear and actionable. We've consolidated our views, even as markets appear to have aligned with some of our consensus views. Yet we still have some difference of opinion on the Fed's ability to continue easing into the second half of 2026 and as you say, this may underpin the US Dollar as markets get wind of the underlying strength of the economy and the effect this will have on rate differentials. I like the way you highlighted that correlation with the US dollar and rate differentials recoupling. With that, we'll be back next month for more information, please visit pinebridge.com. Till next time, thanks for listening.

ENDS