A rate cut still makes sense despite recent inflation data, says HSBC's Max Kettner

Talking with the markets, our next guest does maintain his prediction of three cuts by year end but says fewer cuts won’t be a game changer to risk assets. Joining us today to discuss HSBC Chief Multi Asset Strategist, Max Kettner. Max, always good to check in with you, you’re not alone and I think Morgan Stanley still looking for three State Street I think is actually still looking for 3 + a June cut. But then you know you get these consumption figures and maybe with A3 handle for Q1. Does a cut make sense in that environment? Yeah. Good morning and thanks for having me. I think it still does make sense. I think what we’re doing now is we’re getting a bit too extreme, a little bit to the opposite side what we’ve done at the start of the year. Remember, just 3 1/2 months ago, you know, basically market pricing was for around 180 basis points of cuts, right? The only question was are we going to get 56788 cuts right this year, whereas now you know, now we’re suddenly talk about super core inflation picking up, services inflation picking up, right, all these sorts of really worrisome things. But let’s let’s be honest, when we look at for example inflation data last week, most of the increase, most of the upside surprise in inflation last week has really been driven by things like vehicle insurance, by stuff that you can still argue has at least partially something to do with what’s been happening during the pandemic, right with the the surge in used and new vehicle prices. So I would say you know #1, it’s perhaps cooked a little bit too hot right now, but think people getting from 1 extreme a little bit too much to the other right now #1 and #2, what that does set us up, let’s remember where we are right now. We’ve had yields, the 10 year yields going up almost 80 basis points since the low, right since 380. We have short term inflation expectations that went up from below 2% below target at the start of the year to almost 3% now, right. We’ve got obviously also longer term in longer term central bank expectations now close to 4%. So it does set us up also for any kind of little bit of a dovish surprise whether it’s on inflation or price data or activity data where both the rate side and also the equity market can play a bit of a relief rally. As you know, Sarah’s in DC talking to Lagarde, who is keeping a June cut alive, at least in her her rhetoric. And we talked earlier in the week about what the precedent would be for there to be such a fissure between ECB and Fed policy. What’s your thinking on that? Yeah, I think it does make sense, right? It clearly does make sense when you look at the domestic conditions in the eurozone, growth expectations are in and growth conditions are clearly worse in the Eurozone, also in the UK, right, for the Bank of England. So both for the Bank of England and the ECB, it makes sense. But let’s also be honest, there is a speed bump to how far this can go. It’s not like the ECB and the Bank of England can just do their own thing, right, and are completely independent of what the Fed is going to do. No, that’s not how it works. We’re not in a closed economy here because let’s remember what what would happen is if the ESB already undercuts, the Fed aggressively undercuts versus what is already priced in. The big issue of course would be that the euro would be massively going down and that of course would be fuelling import inflation again. You would see import inflation coming back, inflation surging again in the eurozone and then the ESB admitting to a policy era, right. So even for these, to me it does make sense that they’re going to go in June, that they may perhaps cut a little bit more than the Fed this year. But there is also speed bump to how much this can go. And I do think when we look, for example if at FX, look at where euro dollars trading closer to 105 already, you know we’re already at, you know the source of levels where this is perhaps getting a little bit too stretched.