Market focused on 'dovish FOMC trades' before shifting to election trades - Citi

The testimony from Powell and the June consumer price index (CPI) data have solidified the likelihood of a dovish rate cut in September, indicating that the market "may first implement dovish FOMC trades" before shifting focus to election-related trades, Citi strategists said in a note on Thursday.

"As we are moving towards the first Fed cut in September, we reiterate that most Trump trades may have to wait for after the Fed,” they wrote.

An exception to this is the steepener trade, which benefits from both a dovish Fed and election trades. Positioning for outperformance of US equities over Europe can also be considered earlier, though French equities did not participate in the rebound seen in other French assets post-election, making it a less attractive entry point, Citi noted.

“We have been overweight the US for a long time and have more recently removed our European overweight,” strategists said. “However, it is not a great level to go underweight Europe, as French equities were so far completely unable to join the bounce in other French assets.”

While not entirely a Trump trade, expectations of a Trump presidency could reinforce the fundamental case for a downside in oil.

Citi’s oil strategists are bearish on oil for 2025 due to fundamental reasons. They believe that a Trump presidency might further impact the trade, as tariffs could undermine demand in 2025, and geopolitical factors might shift from being a tailwind to a headwind for oil. Historically, oil does not perform well leading into US elections, strategists highlighted.

"We position for weaker oil by late 2025,” they said.

Citi said it was important that Powell sounded concerned about the labor market, with the Fed chairman stressing that the risks of the labor market slowing too much are now as significant as the risk of inflation remaining too high.

Along with another low inflation print, this indicates that a rate cut in September is indeed the base case, Citi strategists believe. Furthermore, they believe it is counterintuitive that the Fed would attempt to sound hawkish while cutting rates in response to softening economic data.

“We therefore expect a “dovish cut” in September,” strategists remarked.

“While we are now pricing the September almost fully, November may still be underpriced, and even July is not impossible as per our economist. This means that the Fed trade will come first, before the Trump trade can fully kick in.”