Federal Reserve

Next Fed interest rate move could be a cut, Eastspring Investments says

This investor says next Fed move could be rate cut
This investor says next Fed move could be rate cut

May's poor U.S. employment report could trigger an interest rate cut, according to one contrarian investor—a move that would upend the Federal Reserve's plans for policy normalization.

"I'm not convinced the Fed will hike at all; in fact their next move might be a rate cut rather than a hike," Nicholas Ferres, investment director of global asset allocation at Eastspring Investments, told CNBC's Asia Squawk Box on Monday.

Eastspring Investments is the Asian asset management business of Prudential and manages $89 billion of assets.

A cloud of uncertainty is hanging over the Federal Open Market Committee's (FOMC) outlook after data last week showed the country added 38,000 jobs in May, significantly missing the 162,000 expected. The report also highlighted sharp downward revisions in job creation of previous months, with March sliding from 208,000 to 186,000 and April going from 160,000 to 123,000.

The bulk of market observers don't expect any action when the FOMC ends a two-day review on Wednesday, but expectations for a rate hike are high in the coming months. Four-fifths of the 92 economists surveyed by Reuters anticipate an increase at either the July or September meetings. Ferres disagrees.

"I'm sympathetic to the view that you don't want to focus on one data point but the downward revisions in employment, combined with the two quarters of negative profit growth were compelling for me," he explained, referring to the 8.1 and 3.3 percent drops in company profits during the third and fourth quarter of 2015, respectively.

"The labor market typically follows profits so weak profit growth suggests the labor market is likely to slow. And we certainly saw that in trend terms, it [jobs] stepped down from 292,000 in December to around 115,000 in April."

Federal Reserve Chair Janet Yellen holds a press conference following the two-day Federal Open Market Committee (FOMC) policy meeting in Washington March 16, 2016.
Kevin Lamarque | Reuters

America Inc did stage a turnaround in the first three months of the year however, with profits rising 1.9 percent.

Jobs aside, Britain's June 23 referendum regarding its European Union membership is the other key catalyst that erased likelihood of a hike this week.

Ferres didn't provide an exact time frame for his controversial bet but should an interest rate cut materialize, it will likely stun global financial markets and diminish investor optimism towards the world's largest economy.

Moreover, it could severely damage the Federal Reserve's reputation after officials, including chairwoman Janet Yellen, hinted at interest rate increases in recent months.

"Their credibility is under challenge; they should have hiked a long time ago," said Ferres.

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