The Fed cut its cash rate by 25bps a short while ago but hinted at a pause in its easing cycle. There hasn’t been much move in markets though as investors wait for more colour from Powell’s press conference. Earlier in the session, the Bank of Canada surprised markets by signalling an easing bias, which pushed the CAD sharply lower. The NZD has traded a very narrow range the past 24 hours. The ANZ Business survey is the focus locally today.
The Fed cut its cash rate by 25bps, as widely expected by economists and largely priced-in by the market. The upper-end of the Fed funds target range now stands at 1.75%, down 75bps from its cycle peak earlier this year, while the interest rate on excess reserves was also lowered 25bps to 1.55%. There were only minor changes to the statement, with the most notable being the omission of the phrase that the FOMC “will act as appropriate to sustain the expansion”. Instead, the statement says the committee will “assess the appropriate path” of the Fed funds rate. The subtle change in wording suggests the Fed is planning a pause after three rate cuts, although the inference is that is still has an easing bias. The immediate market reaction was consistent with a slightly more hawkish statement, with the USD strengthening slightly (the DXY is around 0.1% stronger vs. pre statement levels) and the US 2 year yield rising 2bps. Movements have been modest, with the market largely priced for such an outcome and investors awaiting Chair Powell’s press conference for more colour on the outlook.
On the session, US equity markets are close to unchanged while bond yields are slightly lower. The US yield curve has flattened, with short-end rates supported by the slightly hawkish Fed statement, but the 10 year yield falling 4bps to 1.8%. The fall in long-end rates occurred as Chile called off the APEC Summit that was due to take place next month due to the ongoing street protests. Presidents Trump and Xi had been planning to sign the Phase-One trade agreement at APEC. The market moves were reasonably modest, with a US spokesperson later saying that it expected to finalise Phase-One “within the same time frame” and Treasury Secretary Mnuchin quoted by the New York Times as saying a deal was likely to be signed in November.
In economic data, US GDP beat expectations slightly, coming in at an annualised rate of 1.9% in Q3 vs. 1.6% expected. The upside surprise was due to slightly stronger consumption growth, which increased 2.9% (annualised) on the quarter. The year-on-year rate of growth fell to 2%, its slowest pace since the end of 2016 and consistent with the moderation in a broad range of US economic indicators this year. There was also a small upside surprise to the ADP employment index, although this indicator has had a mixed track record with forecasting recent payrolls results. The Bloomberg Consensus is for an 85k increase in payrolls in October (data released on Friday night), with the General Motors strike likely having subtracted around 50k jobs from the headline result.
The Canadian dollar is the weakest major currency over the past 24 hours after the Bank of Canada signalled an easing bias. The BoC kept its cash rate on hold at 1.75%, as expected, but revised down its growth forecasts and made reference to the strength in the Canadian dollar and the “worsening global situation.” Signalling that it had moved towards an easing bias, the Bank said it had considered whether an insurance cut was appropriate at this meeting, although it decided against it. The Bank said it would be “monitoring the extent to which the global slowdown spreads beyond manufacturing and investment” in evaluating whether to cut rates in future meetings. The BoC’s shift to an easing bias has led to a large (0.7%) fall in in the Canadian dollar and an 11bp fall in the 10 year Canadian government bond yield. The market has increased its probability of a rate cut at the BoC’s next meeting in December to 30% and a rate cut is now fully-priced by late next year. The BoC statement is a reminder that while financial markets have recently shifted towards a more optimistic view on US-China trade relations and global growth, central banks will be more cautious and slower to move.
There was little reaction to Australian CPI, where both headline and core inflation printed in line with market forecasts. The trimmed mean CPI – the RBA’s preferred measure of underlying inflation – came in at 1.6%, below the bottom of the RBA’s 2-3% target range and way below the mid-point. Despite continued below-target inflation, the market has effectively priced-out the chance of an RBA cut in November and there is now only around a 30% chance of a cut by year-end. The paring back of Australian rate cut expectations this month has been a key driver behind the move higher in NZ rate expectations.
Like most other currencies, the NZD has seen little movement over the past 24 hours. It has mostly traded between a very narrow 0.6340-0.6370 range overnight. NZ short-end rates continued to edge higher yesterday, with the 2 year swap rate rising 1bp to 0.99% and the implied probability of a November OCR cut drifting back to 72%. The focus today is the ANZ Business survey. Activity indicators in the last survey remained at depressed levels, pointing to growth well below the RBNZ’s forecasts. We will be closely watching the inflation expectations component of the survey, which dropped to 1.63% last month, its third fall in a row. If this measure were to slip further this month, it points to the risk of a further fall in the RBNZ’s inflation expectations survey measure, which is released shortly before the November MPS. RBNZ Governor Orr and Assistant Governor Hawkesby have recently emphasised the importance of lifting inflation expectations, so further deterioration in survey-based measures, if that were to eventuate, would be another factor arguing for a November OCR cut.
In the session ahead there are the official Chinese PMIs (manufacturing expected to remain below the 50 mark), Eurozone GDP and, in the US, the core PCE deflator and Chicago PMI. The BoJ also meets and is expected to keep monetary policy on hold, although there is an outside chance it could decide to add or signal more stimulus. In corporate earnings, Apple and Facebook report after the close this morning.