The cry for the inter-meeting cut/Other interesting things

The only reason why I keep hearing people cry for an inter-meeting Fed rate cut is because the Fed over the past few decades has bailed out markets so many times. People have been trained all too well to expect it. I think former Dallas Fed President Richard Fisher yesterday on CNBC laid it out well when he said "The Fed will always act if something occurs that threatens the credit system or the economy and it is not yet clear what has happened the last few days, including today with the Dow off over 1,000, that is going to threaten the economy or the credit system. If it does, then they would move." He also highlighted that the Fed has the Jackson Hole meeting in two weeks that they can use to signal to the markets.   

And while I do believe the Fed had reason to definitely cut last week in order to start taking the edge off interest rates in a lackluster economy, slowing labor market and cooling inflation for now, the bond market has clearly cut rates notably for them already and there is institutional credibility at stake if they respond to every single market hissy fit, especially inter-meeting. And while there have been economic/earnings fundamental, technical and market sentiment reasons to question the sustainability of the stock and credit market rallies, the Fed is not going to respond to a leveraged unwind in an FX carry trade, however huge it appears to have been. 

Japan is not just The Land of the Rising Sun. It became The Land of Easy Money and keep in mind that the BoJ's first rate hike in March 2024 that took them out of negative rate policy, finally, was a full two years AFTER developed countries started to hike and almost three years after emerging market central banks started to. It was the last place on earth that provided cheap money. This leveraged carry trade has been building for a while and I still have no idea how big it got in terms of dollars. And I'm sure it has more unwind to go but it will stop at some point. The question then is whether it's an all clear or we will shift our focus back to the economic and earnings fundamentals that I believe are shifting to a more challenged time. I thus believe in the latter. 

By the way, I did see a strategist at JPM who thinks the yen carry trade unwind is about half done. 

The Nikkei bounced back by 10%, the yen is a bit weaker and the 10 yr JGB yield rebounded by 11 bps after falling by 16 bps yesterday. We still like Japanese stocks and a lower beta way of playing is Seven & I Holdings, the owner of 7-11. Higher rates in Japan, and also in the rest of the world, after years of around zero with mountains of QE, was never going to be a smooth process but one that needed to take place.