Fed cut 50bps, but looks like BoE will keep rates unchanged today

Good morning

So the Fed did indeed cut by 50bps to take rates to 5%, Powell confirmed it was concerns over the employment market that led them to the decision.  He made it clear he did not think the Fed were behind the curve.  The dot plot suggests Fed officials see rates at below 4.375% by the end of this year, and at 3.375% and 2.875% by the end of 2025 and 2026.  Questions already begin as to how big the next cut will be, Powell was keen to say there is no preset course for rate cuts, they will be decided based on incoming data.   

USD fell immediately after the announcement, GBPUSD reached almost 1.3300 and EURUSD 1.1190, but the move didn’t last long and by the end of the US session we were pretty much back to pre-announcement levels.  Overnight GBPUSD dipped as low as 1.3155, EURUSD to 1.1070, but since then we’ve seen USD weakness creep in again and those pairs are now up at 1.3250 and 1.1145 as I type.  This puts GBPEUR at 1.1885. 

USDJPY saw some decent swings, trading from 141.90 down to 140.50 before bouncing to almost 144.00.  It now trades at 142.25.  We have the BoJ rate announcement overnight, no changes expected but we’re looking for any clues as to when the next raise might be.

BoC minutes yesterday showed officials there are still worried about downside economic risks, and see inflation risks as reasonably balanced.  After the softer than expected inflation numbers earlier this week, and with the Fed cutting 50bps, there is a good chance we’ll see a similar sized cut from BoC at their meeting in October.  Data between now and then will be key.

Overnight NZ GDP numbers were not great but not quite as bad as some had feared.  NZD was a bit mixed but is now a touch higher, with GBPNZD at 2.1220 and NZDUSD back above 0.6200 at 0.6245, helped of course by the softer USD.  Aussie employment numbers were decent overnight although the better than expected headline came from a sharp rise in part time jobs, but a small decline in full time work.  AUD is a touch stronger with GBPAUD down at 1.9420 and AUDUSD now at 0.6820, some 200 pips above last weeks lows.

The exploding Hezbollah pagers were followed yesterday by other communication devices such as phones, walkie-talkies and laptops also exploding, causing further deaths and injuries among Hezbollah members.  They vow to retaliate, while Israel move troops to the Lebanese border.  Unfortunately looks like a full-blown war is looming.  The attacks on 7th October last year by Hamas have really upset the entire region.

Spurs scraped through to the last 16 of the League cup with what sounded like an undeserved win over Coventry, two very late goals were needed to turn the tie.  Some players on display for Spurs who haven’t been first team regulars, great to give them a run out but there are big question marks over whether they are up to the job.  A win is a win, but Spurs really need to improve.  There were some other matches last night, Champions League I think, but the League cup is where the big teams want to be!

BoE rate meeting today.  Market looks for no change in rates, I had wondered whether the Fed’s cut of 50bps may give a bit of room for BoE to squeeze another 25bps but no one else really seems to agree with me.  There could be a couple of members voting for a cut, Dhingra, the well-known dove, and possibly Ramsden are likely to see the need for lower rates.  A further 25bps cut is expected to come some time this year, but perhaps not right now.  UK retail sales will be out early tomorrow morning.

We also have rate announcements from Turkey and South Africa today.  Turkey are expected to keep rates at 50%, South Africa could see fit to cut rates from 8.25% to 8.00%.

Have a great day

-  10.00 ECBs Schnabel speaks

-  11.00 Buba monthly report

-  12.00 BoE rate announcement

-  12.00 Turkey rate announcement

-  12.30 ECB’s Nagel speaks

-  13.00 South Africa rate announcement

-  13.30 US Philly fed survey, initial jobless claims

-  15.00 US existing home sales

-  15.40 ECBs Schnabel speaks

-  00.01 UK GfK consumer confidence

-  00.30 Japan CPI

-  02.15 PBoC rate announcement

-  04.00 BoJ rate announcement

-  07.00 UK retail sales

Decision day for FOMC

Good morning

US retail sales a little stronger with upward revisions to last month.  This served to put a stop to the USD selling we’d seen in previous days, the somewhat fickle market thinking that perhaps the US economy isn’t about to fall apart and that a 25bps cut today would be sufficient for now. 

GBP was under pressure across the board yesterday as markets started to consider the possibility of a BoE rate cut Thursday.  GBPUSD, which at one stage had been up at 1.3030, was back down at 1.3160, while GBPEUR which had been at 1.1880 was back down to 1.1840.  In the crosses, GBPAUD, GBPNZD and GBPCAD all lost ground, showing highs to lows yesterday of 1.9580 to 1.9480, 2.1355 to 2.1280 and 1.7985 to 1.7895.

This morning GBP has made a little recovery with GBPUSD and GBPEUR now 1.3190 and 1.1855, pushed up a touch by a stronger than expected core CPI reading earlier this morning.  RPI and core PPI were also higher than hoped, possibly the final nail in the coffin for those looking for a BoE rate cut tomorrow.

Of those GBP crosses, AUD and CAD are still at a similar level, but GBPNZD has slipped further, now 2.1220.  The stronger NZD was down it seems to a decent Westpac consumer confidence number and a lift in milk prices.  It’s a bit of a surprise coming ahead of tonight’s NZ GDP which is not expected to make good reading.

CAD CPI came in softer than expected which adds to the expectation of a 50bps cut by BoC at their next meeting in October.  We’ll have the BoC minutes this evening and I’m expecting them to show to what extent a 50bps cut was discussed at the last meeting.

We are all familiar with James Bond, Ethan Hunt and Jason Bourne but we’re never sure how much of it really has any connection to real life.  Well, perhaps espionage and sabotage is more rife than we think.  I’ve been reading about the Iranian pagers that have been exploding, killing several Hezbollah members and injuring thousands more.  Apparently Israeli Mossad agents planted explosives in some 5,000 pagers, which they were going to trigger as part of a coordinated attack on Hezbollah.  They feared Hezbollah had wind of the plan so had to detonate the devices early.  Iran obviously very unhappy, expect retaliation.  Quite an incredible story, look out for a film about it in the coming years.

It actually reminded me of another film made about another Mossad plan, The Red Sea Diving Resort.  Based on a refurbished hotel in Sudan, it was really a front set up and run by Mossad agents.  Weill worth a watch, if I remember correctly.

So, to the FOMC.  Therer are decent arguments for a smaller or larger cut.  We’ll get the latest dot plot and growth forecasts which will give an insight into current Fed thinking.  I’ve mentioned before that some in the market are looking for Fed cuts on 2024 of up to 1.25%, that’s two 50bps cuts and one 25bps cut.  So one could argue whether its 25bps or 50bps today is less important than whether the dot plot suggests the 1.25% in 2024. 

If pushed I’m going for 25bps only as I would fear that a 50bps cut would signal a degree of panic.  No real point trying to second guess this one, might as well toss a coin.  What us more important is that our clients are protected from any extreme volatility arising from the announcement, and on the whole I believe they are.  Anyone, client or otherwise, who wants to discuss their particular position is welcome to contact us for impartial advice.

-  09.00 South Africa CPI

-  10.00 EU HICP

-  12.00 ECBs Nagel speaks

-  13.30 US housing starts, building permits

-  18.30 BoC minutes

-  19.00 FOMC rate announcement

-  19.30 FOMC press conference

-  23.45 NZ GDP

-  02.30 AUS unemployment

Decision time nears for the Fed, USD remains soft

Good morning

GBP had a decent day yesterday, trading up against both USD and EUR, reaching 1.3215 and 1.1875 through the afternoon although did finish a few points below those levels.  The idea of Fed and ECB cutting rates while BoE look set to remain on hold is propping up GBP for the time being.  Of course the key remains whether Fed cut 25 or 50bps tomorrow, and regardless of the size of the cut, how dovish the overall message is.  If anything, pricing suggests the larger rate cut looks more likely at the moment, and I see some US senators have been pushing for a 75bps cut. 

Otherwise it was a pretty quiet day, no great surprise given the limited calendar and the importance of the data coming later this week.  For today, US retail sales will be seen, they’d have to be pretty exceptional one way or another to really impact the Feds decision.  Canadian inflation numbers are out, a softer reading is likely to get the market looking for a 50bps cut at their next meeting in late October.

Having traded below 140.00 for the first time in over a year, USDJPY had an odd spike back up to 141.20 overnight before trading back to 140.30.  Now 140.55, I’ve not seen a decent explanation as to what led to the move, a lack of liquidity has been suggested but it is perhaps more likely to be a simple bout of squaring up of short USDJPY positions ahead of the FOMC.

We’ll have the latest UK inflation readings early tomorrow morning.  Headline CPI is expected to stay at 2.2%, although core CPI could well tick higher to 3.5%.  If so, it will be difficult for BoE to justify a rate cut on Thursday.  Perhaps if Fed were to cut by 50bps, BoE could consider a 25bps cut.  I’m not suggesting BoE policy has to follow the Fed, but their rate moves will have some bearing whether or not they care to admit it. 

In other news I see a new Covid variant has emerged which looks set to become the dominant strain this autumn and winter.  Named XEC, it is reported to have better transmission potential than other recent variants.  All the usual symptoms, mind you I’m not sure we have any test kits any more so a common sense approach will have to apply should we be unlucky to catch it.   Still, rather that than M-Pox, which although is pretty unlikely, I see the government has ordered additional supplies of vaccines amid growing concern of the outbreak in DRC and other parts of Africa.

I see universities are calling for the need to increase fees.  I know several young people at university and they all seem to say the same thing.  They have fund, yes, and it can be some of the greatest years of a young life.  But for the £9,000/year fee, face to face learning is down to a few hours each week, much of it is on line and in some cases it is older students are teaching younger students.  I do wonder how quickly one could pass a degree if the fun, partying and long holidays were stripped out of it. 

I see some Uni’s are already offering two year accelerated courses, they are charging over £12k per year for the privilege but with less spent on accommodation and living, for some it may work.  I know it may not be the idea but if a lot of learning is going to be online, let’s go one step further and just offer remote online learning and make it completely affordable.  Is Open University still a thing?

Champions League begins this evening, I’m interested but for some reason feel less into football than I have in previous seasons.  No, its nothing to do with Spurs not being involved, perhaps when the cold, dark winter nights really arrive I’ll be more inclined to curl up for the evening on the sofa but for now I seem to have other things to do.  Still, Milan vs Liverpool does sound like an interesting tie.  Kick off at 8pm, hhmmm it’ll be cold and dark by then I’m sure……

Have a great day

-  10.00 German ZEW

-  13.30 US retail sales

-  13.30 CAD CPI

-  14.15 US industrial production

-  00.50 Japan trade

-  07.00 UK CPI, PPI, RPI