Rates cut by 25bp

  • FOMC cut rates by 25bp
  • Equity indices fell off
  • Fed decides to end balance sheet run off in September

The Fed decided to cut rates today with the message that ‘this action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain.’

In relation to the balance sheet run off suspension, Powell said ‘The Committee will conclude the reduction of its aggregate securities holdings in the System Open Market Account in August, two months earlier than previously indicated.’

Equity indices sold off on the cut most probably as a reflection of declining fundamentals. On top of this, there has been some trouble on the trading desk of the New York Fed, which usually steps into the market to protect against large plunges. The market may have therefore been affected by this.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against the action were Esther L. George and Eric S. Rosengren, who preferred at this meeting to maintain the target range for the federal funds rate at
2-1/4 to 2-1/2 percent.

You can read the official statement here.

Fed likely to cut rates

  • Fed could cut by 25bp
  • Unlikely to cut by 50bp but it has become more and more priced in
  • Possible this meeting is highly politically charged

The Federal Open Market Committee meets this evening to discuss monetary policy going forward.

With pressure from Donald Trump on the Fed, this could be a very important turning point for markets going forward.

With the yield curve inverted, this could be a play to stave off recession for as long as possible by easing the markets, but it totally depends on how participants take the dovish signalling as to whether markets remain elevated or decide to sink.

As of writing, the 10yy is trading at 2.06%.

A ‘disappointment’ of no cut would likely lead to the 10yy pushing to the upside and therefore upwards pressure on the dollar, but with the Treasury’s fiscal expansion occurring over the next 6 months, the market is likely to take this as bullish dollar due to a reduction in USD liquidity.

Japan unchanged

  • Kept rate policy unchanged at -0.1%
  • However, signalled that they would respond like other central banks to external risks surrounding narrowing interest rate differentials

Bank of Japan Governor Kuroda said today that he maintained that BoJ policy was committed to addressing continued low inflation.

After announcing that rates would be kept unchanged, forward guidance changed slightly due to the rate cut the US undertook the day previous.

A key takeaway from the statement was that the BoJ would continue to buy bonds that would lead to the yield on the 10 year dropping to 0%.

The deputy governor, Masayoshi Amamiya, said that the BoJ were concerned about global headwinds to growth that could affect the Japanese economy, specifically surrounding China and the UK’s exit from the European Union.

However, Amamiya believes that the US rate cut was a good thing, since if the US economy rebounds, it’s likely that growth effects would be felt in Japan.

The Yen appreciated vs USD in the hours after the speech as shown below.

You can read the official statement here.

Japan: still below zero?

  • Likely to keep rates on hold as they are already negative
  • Likely to show some concern over strengthening USD vs Yen
  • Could show some change to forward guidance following global slowdown

The Bank of Japan meet later today to determine the interest rate path going forward and to provide the market some colour as to what their forward guidance is likely to be.

Japan has followed unconventional monetary policy for the last 20 years and has been in a state of easing since.

The BoJ is likely to be under pressure to ease further following cuts in Europe and the US and the market is signalling that further rate cuts are likely, especially with the market pricing in a further 50bps cut more and more as we near the Autumn when equity market volatility tends to pick up.

Japan has tended to be a strong export base economy and threats from the USD interest rate differential narrowing could put this under pressure, so this is likely going to be something the BoJ would want to avoid.

Not one rate hike during Draghi’s ECB presidency

  • Draghi keeps rates on hold as the market expected.
  • Many hints towards monetary easing in the future.
  • Draghi will not be hiking rates during his tenure as ECB President.

The ECB today held rates flat as issues with Eurozone data kept the Governing Council dovish.

The Governing Council’s statement was as follows:

At today’s meeting the Governing Council of the European Central Bank (ECB) decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council expects the key ECB interest rates to remain at their present or lower levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to its aim over the medium term.

With German business confidence floundering for July, it is probably the right decision to remain flat at this time.

Draghi did go further, however, and expressed a desire for added stimulus in the future.

More key, though, was the mentioning of a change in fiscal policy from individual states.

Draghi said:

Regarding fiscal policies, the mildly expansionary euro area fiscal stance is providing support to economic activity. At the same time, countries where government debt is high need to continue rebuilding fiscal buffers. All countries should reinforce their efforts to achieve a more growth-friendly composition of public finances.

The market is likely to have taken this as a signpost that the ECB is admitting its monetary policy over the last decade has failed to spur growth, alongside it having been a rather dovish press conference, since EURUSD ended up flat on the day after an initial spike.

You can read the official statement here.

Rate change remains remote

  • Governing Council likely to signal no rate cuts for now, but added stimulus and rate cuts in the future.
  • Therefore, unlikely that Draghi will preside over any interest rate hikes during his term.
  • Euro trading above 1.1150 pre event.

The ECB meets today to determine the interest rate path for the coming months.

It is highly unlikely that they will change the rate since there are few tailwinds to European inflation expectations and still many headwinds to global growth.

It is likely that the situation with Deutsche Bank will be discussed in the press conference after the opening statement.

Weaker than expected Eurozone PMIs were released yesterday which reinforces the idea that a hike most certainly will not be on the cards, and that policy will remain loose going forward.

The market is likely to take any talk of added stimulus as being very dovish so one could expect bond yields and therefore the Euro to face some downside pressure.

Powell: trade uncertainties, global uncertainties weigh heavy

It is becoming more and more likely that the Fed are going to cut rates this month, as Chairman of the Federal Reserve, Jerome Powell, said that the US China trade war has caused firms to stockpile, while not particularly restraining growth.

Powell used the word insurance with regards to a rate cut to make sure that growth and inflation were not pushed lower in the future.

“Since then, based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. outlook,” Powell said.

Essentially, lower rates could cushion the impact of the current trade war which is having an impact on business investment, according to previous Fed minutes.

The importance was placed on weakening global data surrounding growth which is likely to have a material impact on US data.

What’s more, is that even though unemployment is at record lows, we are not seeing a follow through in inflation as the Philips Curve should suggest.

This adds to the Fed’s reasoning for cutting rates.

He was questioned by Ocasio-Cortez on this relationship, and replied with the link having degraded, “to the point where it’s a faint heartbeat.”

It seems as if the Fed are more concerned with what hiring and purchasing managers are going to be doing going forward than anything else, which is what is making a rate cut most viable.

Canada: waiting on hold again

  • Expected to keep rates on hold
  • Chance for a cut if the want to weaken CAD or not be behind the curve of a Fed cut
  • Could be some talk of oil price drivers

The Canadian Central Bank will meet later today to decide what the bank rate should be going forward.

Over the last few years, the CAD has been extremely strong, and this could add pressure for Canadian exporters and relate to dampened growth prospects forcing the bank’s hand to cut.

It is however expected that they shall remain flat on rates as growth, employment and other data points have been strong and have been strengthening.

The last time the bank focused on currency strength was back in 2016 where a strong CAD did weigh on the health of the nation.

Polos has held strong over the past decisions by not really budging as many others had been cutting.

It is likely, however, that they will cut once this year due to mounting corporate debt issues and the above mentioned, strong CAD.

Rates on hold, for now

  • Fed keeps rates on hold
  • ‘The labor market remains strong and that economic activity is rising at a moderate rate’
  • ‘Market-based measures of inflation compensation have declined’

The Fed this evening kept rates on hold at 200-225bp with little changed on the May statement, apart from a mentioning of a decline in market-based measures of inflation, which one can assume are the inflation expectations ETF (RINF) and inflation swaps.

As per, the Fed maintain that they wish to maintain their 2% inflation rate mandate and will continue to assess labour market and growth conditions.

However, the FOMC also expressed concerns with regards to the inflation outlook, a by product of which would be growth and global economic conditions headwinds.

From the FOMC statement:

‘The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.’

This is conducive with the initial statement of the market showing declining inflation expectations.

Because of this, it is likely the ES took the message as being dovish.

The chart below shows what happened from the start of the introductory statement to the end.

The ES rallied 13 point from start to finish and pushed up post FOMC as well.

You can read the official statement here.

Rate cut on the cards

  • Fed likely to keep rates on hold
  • Chance of hike in 2019 is pretty much zero
  • Rate cut this year becoming much more likely

The Fed is likely to keep rates on hold today as some headwinds to global and US growth still remain.

Although there had been good NFP data of late, it is unlikely that this will have been real reason for the FOMC to turn too hawkish.

China, Brexit and European issues are still weighing, and the Fed are likely to be anxious with regards to any possible deleveraging that could happen through being too hawkish.

What’s more is that there is more and more pressure from the White House with regards to not raising rates.

US 10 year is trending downwards and the entire yield curve is inverted – this should be a recessionary indicator and it would be counter-intuitive for a Fed cut to occur as this would signify actual belief of recession, where data doesn’t point to recession.