Fed’s Rate Cut Tone Underwhelms Expectations in Emerging Markets


Container ships in Mombasa, Kenya.

Photographer: Luis Tato/Bloomberg

Not even the U.S. Federal Reserve’s second rate cut this year could placate emerging-market investors eager for further easing to help buoy assets in less industrialized nations.

The MSCI index of developing-world currencies fell 0.2% as of 10:16 a.m. in Singapore, while a measure of stocks declined 0.2%. The Fed reduced its benchmark rate by a quarter percentage point, less than some investors and analysts expected. Fed Chair Jerome Powell also
made clear
policy makers did not expect deep rate cuts to be needed.

MSCI indexes for emerging markets trim earlier gains after central bank decision

“Given recent market resilience, the market seemed to expect an outlook for further cuts,” said Malcolm Dorson, who helps manage $640 million of emerging-market funds at Mirae Asset Global Investments in New York. “From an EM perspective, the market would have like to see this translating into supportive EM yield differentials and a weaker USD.”

Traders will probably now look beyond the Fed’s decision and start to refocus on economic data and clarity in the U.S.-China trade war as officials meet to negotiate, said Dorson, whose emerging-markets
has outperformed 98% of peers in the past year.

Here’s what analysts, strategists and money managers are saying about today’s drivers for emerging markets:

Mirae’s Dorson:

  • Powell’s comments “sounded more neutral than explicitly hawkish”
  • “Though the market hoped for a bias, Powell reiterated that the Fed remains data-dependent and will monitor and adapt to conditions meeting by meeting. I don’t think that this meeting alters the rate cutting outlook we’ve been seeing in Brazil, Russia, Mexico, and others within the asset class”

Yuji Kameoka, chief foreign-exchange analyst at Daiwa Securities Co. in Tokyo:

  • “The dollar is bought and emerging currencies are sold on speculation of a smaller chance of an additional rate cut by the Fed for the rest of this year, but I think there’s a higher chance for further reduction”
  • Based on that view, the increase in the dollar and U.S. Treasury yields as well as sell-offs of emerging-market currencies are unlikely to last long
  • The number of those who supported a cut exceeded those who were against it this time around, so there is still a possibility that those who are supporting a further reduction in rates will continue to stick to their conviction, making it more likely for another cut by the year end
  • All in all, the scenario of dollar weakness supporting emerging currencies remains intact

Brendan McKenna, a foreign-exchange strategist at Wells Fargo Securities in New York:

  • A lot of the strength in emerging currencies this month was tied to hopes for “more aggressive” Fed easing
  • Instead, the so-called dot plot shows that “Fed members believe no more cuts in 2019 and 2020,” which is more hawkish than markets expected
  • “I’m not surprised EMFX is giving up some gains”
  • “I could see that getting priced out over the next few weeks, especially if U.S. data remains strong like we’ve seen over the last 2-3 days”

Lale Akoner, markets strategist at Bank of New York Mellon:

  • “Markets have been calling for a higher rate cut from the Fed (a 50bps rate cut)”
  • A stronger dollar after the Fed cut by 25 basis points put some pressure on emerging markets
  • U.S. dollar “may continue to show strengthening bias as the Fed is acting cautious in cutting rates”
  • “Any significant continuation of USD strengthening will continue to put pressure on EMs”

Ilya Gofshteyn, a senior EM macro strategist at Standard Chartered in New York:

  • “Some markets participants may have expected a more explicit signal of further easing after this meeting”
  • The Fed lacks a sense of urgency, which might make emerging-market investors feel that “yield differentials will keep USD supported and further pressure EM FX”
  • Powell’s overall tone was similar to the statement’s in that even though risks appear to be to the downside, the Fed isn’t ready to promise more easing

Sonja Gibbs, managing director of global policy initiatives at the Institute of International Finance in Washington:

  • Commentary and the forward guidance wasn’t as dovish as might have been expected, judging from the dollar’s reaction here
  • The key thing is that it doesn’t seem like there’s clear consensus about how to move forward on further easing

— With assistance by Aline Oyamada, Yumi Teso, Karl Lester M Yap, and Tomoko Yamazaki

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