Nomura joins Goldman, JPMorgan in predicting Fed rate cut in July, sees global rate-cuts revving up

By the end of June, Nomura expects rate cuts from European Central Bank (ECB), Swiss National Bank (SNB), Bank of Canada (BoC), People's Bank of China (PBC/PBoC) and Bank of Thailand (BOT).

The global rate-cutting cycle is revving up and the US Federal Reserve is likely to cut rates in July and implement another cut in December, according to Nomura's latest Economic Insights report.

A pick-up in the rate-cutting cycle would make it easier for other central banks to follow and that this would be particularly relevant for emerging markets, it said.

While financial powerhouses such as Bank of America, Morgan Stanley and UBS Wealth Management continue to expect the Fed's first rate cut in December, Nomura joins JPMorgan and Goldman Sachs in expecting an earlier rate cut. Nomura's prediction comes after Fed Chair Jerome Powell said recently that he expects inflation to move back down but added that his confidence in that happening was not as high as it was before.

Also read: Gold climbs as cooling US inflation bolsters Fed rate cut bets

Nomura's Rob Subbaraman and Yiru Chen wrote that with the US core CPI easing in April and mounting evidence that the country's economy is slowing, their conviction in a July rate cut is rising.

They also said that what is "less appreciated" is that a global rate-cutting cycle is already well underway, and that there is an unusual situation with just the right domestic economic conditions for central banks of other countries to decouple from the Fed.

Given this and the US economic data, Subbaraman and Chen said that by the end of June, they expect rate cuts from the European Central Bank, Swiss National Bank, Bank of Canada, People's Bank of China and Bank of Thailand.

"As the global rate-cutting cycle revs up, a cross-country comparison of core CPI inflation, the Sahm Rule indicator of recession risk and the real policy rate... highlight how some central banks have been slower than others in starting rate cuts (of course, there are other factors to consider, such as the fiscal stance and financial stability risks)," they wrote.

The Sahm Rule, put forward by Fed economist Claudia Sahm, is used to signal the start of a recession from a three-month moving average of the national unemployment rate in the US. According to the rule, if the average rise is 0.5 percent more than the low of the previous 12 months, then the recession is either already on or is coming.

The three key gauges to assess the scope for policy rate cuts, according to the report, are given in the chart.

"Based on all three metrics, the Bank of Canada seems ripe to start cuts, as does the Reserve Bank of New Zealand and the South African Reserve Bank. Brazil and Mexico still have very high real rates, and it would seem they have significant scope to cut as the global rate-cutting cycle broadens," Subbaraman and Chen wrote.