Nordea Asset Management has changed its view on the Fed call, announces the company's Senior Macro Strategist Sebastien Galy in an email.
Nordea had expected consumers to become unnerved by recession talks, which, combined with changing pricing preferences, would have had a negative impact on inflation, Galy writes.
"What we also expected was for the Fed to passively resist the White House’s call for monetary easing in retaliation for the brutal pressure put on the Fed’s chairman."
But the Fed and the US government have not managed to change the public discourse on the economy fast enough, Galy notes.
He writes that consumption and consumer sentiment are likely to continue to weaken while CEO confidence at the Conference Board is close to an all-time low and a bad omen for future capex expansions.
"That leaves little room for the Fed to operate," Galy writes.
Further tightening by the end of 2021
According to the Luxembourg-based analyst, the odds now are for the Fed to make more aggressive cuts irrespective of its views on the White House as the economy and growth slow down.
Currently, the Fed fund rate has 64 basis points in rate cuts till the end of 2020, Galy writes.
"The odds are that these cuts will happen by year-end as we are no longer in a mid-cycle correction. The odds are that by mid-2020, we will be around 50 basis points while the Fed pushes a far more positive message of a temporary shock.
By the end of 2021, we may very well have to tighten further," Galy writes.
The current Fed Funds Rate is 2.25 percent.
"Higher yielding US Treasury should drive demand for safe-haven assets"
In Galy's view, the impact on the dollar versus emerging markets and EM hard and local currency fixed income should be quite positive for these asset classes as it will be as transient a demand shock in the US as it currently is in China.
"The impact on equities should be mixed. It should be positive for defensive stocks as it reduces their financing costs, such as utilities, while the demand shock should hurt cyclicals and growth stocks."
Finally, the dearth of safe havens, including higher yielding US Treasury, should drive the demand for safe-haven assets from Japanese government bonds to European covered bonds, particularly in Italy and Greece, Galy adds.