Overnight Headlines
- BoJ leaves policy unchanged, calls for review in October as risks rise
- Federal Reserve cuts rates as policymaker splits deepen
- Australian August unemployment at 1-year high, rate cut seen in October
- New Zealand's economic growth slows to more than a 5-year low
- DUP signals softening on Northern Ireland specific Brexit solutions
US equities pared intraday losses to end the day marginally higher. Stocks are consolidating just below all time highs having had a few days of range expansion. As long as we don't lose support around yesterday's low at 2977, then a move towards those highs seems likely.
USD strengthened against all of the majors as the Fed statement showed that officials are split over the
need for further rate cuts. The DXY gained 0.3% to finish at 98.56, paring the prior day’s losses and printing an 'inside day'. Expect more sideways trading with momentum indicators stalling.
US bonds were mixed with yields slightly higher on the day. The US Treasury curve flattened with the 2-year yield gaining 3.7bps to 1.76% while the 10-year yield was little changed at 1.79%. More upside looks probable, again with yesterday's lows acting as support.
The FOMC cut interest rates for the second time this year last night, by 25bps to a range of 1.75-
2.00%, as widely expected. The vote in favour of policy was 7 to 3 with Bullard voting for a 50bps cut while
George and Rosengren wanted to keep rates unchanged, for a second straight meeting, as we wrote in our preview.
The accompanying press release was little changed from July’s, but the Fed’s projections showed a more hawkish line that many had expected. Their median forecast indicates they don’t expect to cut rates again this year or next with the policy rate moving 25bp higher in 2021.
The new growth and inflation forecasts showed a small uptick in growth while the latter was left unchanged with both headline and core PCE at 2% in 2021. There was no acknowledgement of the recent pick-up in core CPI or wages, both of which are running at their fastest pace since the GFC.
Other than reaffirming the committee’s concern over global growth, trade uncertainty and domestic inflation, Chair Powell did not signal any deviation from the current course of action. That said, the desire to not unnecessarily leave ‘dry powder’ in the face of growing risks potentially supports additional fine tuning this year. Ultimately, trade policy and monetary policy remain deeply entangled.
With a 7-2 vote, the Bank of Japan this morning kept its Quantitative and Qualitative Easing (QQE) with yield curve control and forward guidance unchanged. Overseas risks continue to increase and the momentum towards achieving their price stability target may be lost. If the outlook sours further and fosters JPY strengthening, the BoJ could take action in October by cutting the policy rate further into negative territory.
Currency Majors
EUR looks rangebound at present. Despite the relatively sharp drop on Monday, the subsequent rapid bounce reinforces this view and we expect the single currency to trade sideways within a broad 1.0925/1.1130 range for now.
GBP is holding its recent gains, having pushed higher to test the 1.25 area. This completed the test of the 38.2% Fibonacci retracement resistance after the early September push through resistance in the low 1.22 area. There is the chance of a rising wedge formation which suggests a weakening in upward momentum. This means short term weakness below 1.2440/50 will trigger more drift back towards 1.23. However, if we can break above 1.2527, we will see more upside.
JPY has fallen below 108 as markets had seen some chance of BoJ easing already today. It looked like we had broken out to the upside yesterday but USD/JPY is struggling around the 100 day moving average. A move above 108.50 sees 108.85 and higher while 107.44 acts as firm support.
Key Events
The Bank of England rate decision is released at midday today and there will be no news conference or inflation report. Markets are fully expecting rates to be kept on hold at 0.75%, which is somewhat at odds with the recent dovish pivot by other major central banks and the dismal growth outlook.
The bank is essentially adopting a ‘wait-and-see’ approach both to the ‘B’ word and the hawkish signals coming from increasing wage pressures, which are running close to post-crisis highs. The expected boost from stockpiling ahead of the Brexit October 31 deadline may also confuse the economic picture.
Of course, since the last BoE meeting, the risk of a ‘no deal’ has undoubtedly fallen with the passing of a Parliamentary bill to force an Article 50 extension should the government fail to get a deal approved by lawmakers. This has shifted rate expectations as they no longer indicate a rate cut within the next 12 months, in fact no move in rates is seen for the next three years or so.
Before the BoE, we get the Norges Bank rate decision which could be one of the most exciting rate-setting meetings for some time. In contrast to every other major central bank, we saw a clear signalling of higher rates at their previous meeting. Even as global risks and a slowdown have been increasing, the Norwegian economy continues to rattle along with growth still above trend, strong wage growth and a tightening labour market. Most Norges Bank observers also believe they will signal a slight probability for a rate hike during the remaining forecast period.
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