Fed cuts, but again, fails to flag fully-fledged easing cycle

It was a jam-packed night of news in financial markets, overnight.

Source: Bloomberg

A big night in global markets

It was a jam-packed night of news in financial markets, overnight. The US Federal Reserve cut interest rates by 25-basis points, as broadly expected, but proved too hawkish for the market’s liking. At that, looking at the central bank’s dot plots, the Fed is looking like a central bank divided. There were more fireworks in US short-term funding markets, sparking some level of concern and confusion. Tensions in the Middle East remain high, as US President Donald Trump demanded higher sanctions on Iran. And market participants, locally and abroad, continue to prepare for a big day ahead, with Aussie jobs numbers released, and more central banks meetings scheduled.

Fed cuts again, but avoids committing to further easing

Of course, it was never going to get any bigger than the US Fed’s meeting, and it’s driven most of the narrative in the past 24 hours. Indeed, rates have been cut, but the markets are seemingly disappointed. Positioned as another “insurance cut”, the Fed has stuck to its line that the US economy remains strong, and that recent rate cuts have only been implemented to manage downside risks to the US economy. Naturally, stocks sold-off on the news – however, Wall Street did rally into the close. While US Treasury yields lifted, and the US Dollar climbed, as traders moderate expectations for further monetary policy easing from the Fed.

US Fed’s dot plot implies no further moves from Fed

The most curious element of this meeting, as it was always going to be, was in the “dot plots” the Fed produced, to gain better insight into the potential path for future rate cuts. Leading into this meeting, the market was betting on four cuts from the Fed in the next 12 months – a clear signal the market fears a US economic slowdown. To market participants’ chagrin, the Fed’s dot plots came nowhere near market expectations. Though showing a mixture of views, with some Fed-members expecting higher rates and some much lower, the “median” view for the Fed implies no further cuts in the year ahead.

Is this a Fed divided?

That mixture of opinions on the Fed, more-or-less, sums up the key takeaway, at least as far as the punditry is concerned, from the meeting. We’re looking at a Fed divided. The hawks are saying that the strong labour market, robust consumption, and near-target inflation means rate cuts are necessary. The doves are suggesting the diminishing global growth outlook means that the Fed need to cut now to get ahead of the next economic slowdown. Such is the split in opinions on the Fed currently, at this meeting along, some members saw no need for a rate cut, while others saw the need for a 50-point cut.

Funky action in US money market causing anxiety

Of other pertinent US financial news overnight, and anxieties are still high because of some curious activity in US short-term money markets. The Fed – totally independent of its meeting – had to step in to support financial markets during North American trade with extra funding to push-down a spike in short-term interest rates. This has been happening all-week, and an absolute explanation for the dynamic is still being searched-for. However, it is leading to some level of fear that the activity in money markets portends a deeper, more troubling problem, which could lead to a blow-out in interest rates, and cause pains throughout the financial system in the near future.

Oil still volatile on mounting tensions in Middle East

Outside of the Fed, and tensions in Middle East remain elevated, with volatility in oil markets relatively high. The chances for outright conflict in the region still appears to be growing, with the Saudi’s re-affirming publicly last night their conviction it was Iran who were behind the weekend’s drone attack on one of its key oil facilities. In addition to this, US President Donald Trump announced his desire for further sanctions on Iran. Oil prices dropped last night, with WTI Crude shedding nearly 2%, unaided by a weaker than expected drawdown in US crude oil inventories last week.

A full economic calendar; local jobs data in focus

The Bank of Japan, Swiss National Bank and Bank of England all meet today, and will highlight the global economic calendar, globally. But locally, the big news will be the release of Australian labour market data. The unemployment rate ought to hold at 5.2%, courtesy of 15k jobs added to the economy. The key issue for the RBA right now is “spare capacity” in the labour market. A miss in today’s numbers would only compound that issue, and likely lead the market to boost bets that another rate cut will be coming from the RBA before November.


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