Fed Hit The Pause Button

FOMC cut rates, but indicate no more to come; the BoC strike a cautious tone; prepare for a plethora of eurozone data points this morning

Previous Day's Market Highlights

That's your lot, the Fed are now on hold.

Wednesday saw the Federal Reserve announce their 3rd 25bps rate cut in as many meetings, bringing the target range for the Fed Funds Rate to 1.50% - 1.75%; though policymakers indicated that rates are now likely to be left unchanged for some time. The FOMC were, however, again divided on whether to loosen policy, with hawkish Committee members George and Rosengren once again favouring keeping policy on hold. Meanwhile, the rationale for yesterday's rate cut was broadly similar to the previous two, namely an attempt to provide 'insurance' against ongoing geopolitical risks - namely ongoing US-China trade tensions and a global economic slowdown.

However, with a rate cut having been fully priced in before the meeting, the policy outlook is where things get much more interesting. The FOMC removed their explicit easing bias from the policy statement; replacing their pledge to 'act as appropriate' to sustain the expansion, with a promise to 'monitor incoming information as it assesses the appropriate path' for interest rates. Such a revision indicates that the Committee believes that they have taken out enough 'insurance' - after delivering 75bps of rate cuts this year - and will now monitor the impact of the policy loosening before adjusting rates. Fed Chair Powell reiterated this stance in his post-meeting press conference, indicating that monetary policy is in a 'good place' and that the 'current stance of policy is likely to remain appropriate'. It is also clear that only a 'material reassessment' of the economic outlook would alter the FOMC's current stance; therefore, it would seemingly need an economic catastrophe for Powell to cut rates again. Such comments are more hawkish than previous indications, further evidence of the FOMC pushing back on the notion of additional cuts this year.

For markets, while the rate decision was largely as expected, the removal of the easing bias failed to significantly lift the dollar. The greenback ended the day 0.2% lower against a basket of peers, a result of the decision being largely priced in, and some cautious comments from Powell that a 'significant' rise in inflation would be needed before any rate hikes. Why we're talking about rate hikes when the Fed have only just announced a pause in easing policy is, however, beyond me!

Elsewhere, a couple of other monetary policy decisions were in focus. In Canada, the BoC kept interest rates at 1.75%, as expected, though struck a more downbeat tone on the prospects for the Canadian economy. The BoC emphasised downside risks, indicating that the resilience of the economy 'will be increasingly tested' as trade conflicts and uncertainty persist. The increasingly dovish tone resulted in a weaker loonie, which shed around 0.7%, as markets begin to price in the prospect of policy easing in the medium-term.

Overnight, the Bank of Japan also kept monetary policy on hold, though struck a more dovish tone. Policymakers indicated an increased chance of a rate cut in the near-future, stating that rates will stay at 'current or lower levels for as long as needed'. The yen was largely unmoved by the decision, with question marks continuing to hang over the BoJ's ability to further ease policy.

Meanwhile, in Westminster, no notable developments occurred, so sterling went nowhere fast - what a nice change!

Wednesday also saw a couple of US data points that are worth mentioning. October's ADP employment change figures beat expectations, showing 125,000 jobs added to the economy, though provide further evidence of the continued slowdown in hiring. Also beating expectations was third quarter GDP data, showing the US economy growing at 1.9% on an annualised QoQ basis. This does, however, represent the third straight quarterly decline in the pace of economic growth, indicative of the ongoing manufacturing slowdown and uncertainties caused by trade tensions.

Speaking of trade tensions, confusion continues to reign, with the November APEC summit - scheduled to be the venue for Presidents Trump and Xi to sign a phase one trade deal - being cancelled due to civil unrest in Chile. According to Treasury Secretary Mnuchin, however, the deal is 'likely to be signed in November'; with Macau suggested as a possible location. This helped to boost risk sentiment, seeing the Aussie dollar add 0.5%, and the Kiwi dollar gain 0.4%.

Away from FX, European equities settled unchanged as market participants remained cautious ahead of the FOMC meeting. Across the pond, the US benchmark S&P 500 gained 0.3%, closing at a fresh record high, after the FOMC decision. Finally, oil prices lost ground, as a rise in US inventories exerted pressure. Global benchmark Brent settled 1.6% lower, while US WTI crude shed 0.85%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1580 1.1661 1.1086 4.93%
GBP/USD 1.2925 1.3012 1.2195 6.28%
EUR/USD 1.1165 1.1179 1.0940 2.14%
GBP/AUD 1.8675 1.9094 1.8076 5.33%
GBP/NZD 2.0130 2.0559 1.9311 6.07%
GBP/CAD 1.7005 1.7095 1.6253 4.93%

Today's Market Highlights

For a second straight day, impactful economic releases are set to dominate - meaning I may get through this whole Note without too many mentions of Brexit! On that not, today's UK economic calendar is barren, hence sterling should remain rangebound.

However, from the eurozone, this morning is chock full of releases. Arguably of most importance will be the first estimate of third quarter GDP, expected to show economic growth continuing to decline, and verging on stagnation. Expectations are for the economy to have grown by 0.1% on a QoQ basis, and by 1.1% on a YoY basis, representing the slowest pace of expansion since the first quarter of 2013, just after the end of the sovereign debt crisis. The slowdown is likely to have been driven by those all-too-familiar factors of weakness in the manufacturing sector, and sluggish business investment due to increasing global uncertainties.

Sticking with the eurozone, this morning will also see the release of October's flash CPI figures, expected to show inflation remaining incredibly benign. Headline CPI is expected to dip to just 0.7% YoY, the slowest pace in over 3 years, while core CPI is set to remain unchanged at 1% YoY. Should the GDP and CPI figures be released in line with, or softer than, expectations, this would provide further evidence of the need for the ECB's continued ultra-loose policy stance, in addition to the ever-more pressing need for fiscal stimulus from eurozone governments. 

This morning's final eurozone data point is September's unemployment rate, expected to hold steady at a post-crisis low of 7.4%. While the release may have little immediate market impact, the failure of ongoing tightness in the labour market to exert significant upward pressure on inflation is perhaps evident of deeper, structural issues that will need to be addressed in the not too distant future.

Heading across the pond, the data continues to come thick and fast throughout the afternoon session. Of primary interest will be the release of September's core PCE price index - the Fed's preferred measure of inflation. The index is set to have increased at 1.7% YoY, providing further evidence of the subdued inflation backdrop in the US. At the same time, last week's initial jobless claims data is expected to hover close to the 4-week average of 215k; while August's Canadian GDP figures are expected to show the economy growing at 0.2% on an MoM basis.

Finally, today's central bank speaking calendar is relatively busy. Market participants will pay close attention to remarks from ECB Vice President de Guindos, as well as SNB Chairman Jordan, for any hints on the policy outlook. Furthermore, keep an eye out for statements from FOMC voters George and Rosengren, with it being customary for policymakers to explain their dissent shortly after the policy decision has been made.

Today's Economic Calendar

Time Currency Release Consensus Previous
10.00am EUR GDP (QoQ - Q3 1st Est.) 0.1% 0.2%
10.00am EUR GDP (YoY - Q3 1st Est.) 1.1% 1.2%
10.00am EUR Flash CPI (YoY - Oct) 0.7% 0.8%
10.00am EUR Flash Core CPI (YoY - Oct) 1.0% 1.0%
10.00am EUR Unemployment Rate (Sep) 7.4% 7.4%
12.30pm USD Core PCE - Price Index (YoY - Sep) 1.7% 1.8%
12.30pm USD Initial Jobless Claims (Oct 25) 215k 212k
12.30pm CAD GDP (MoM - Aug) 0.2% 0.0%