Last nights Fed decision was almost a side issue to concerns about US dollar liquidity which has seen short term rates push above the Fed Funds rate, forcing the US central bank to increase the amount of short-term funding available for the first time since the financial crisis in 2008.
A number of reasons have been cited for the squeeze in funding costs, including the settling of quarterly tax bills, as well as the settlement of $78bn of US treasury notes. With bank reserves also quite low and triple witching settlements due later this week, questions are being asked as to whether this spike in short term rates is a symptom of something more sinister with respect to the plumbing of the US financial system.
If the stresses in the system subside over the next few days, and short-term rates fall back, then these concerns should subside. If not, it raises some important questions as to why US funding markets aren’t working as they should.
In any case the Fed did what the markets expected and cut rates by 25bp to 1.75%-2%, although the decision was not unanimous, and President Trump had his obligatory twitter tantrum, criticising the Fed for having “no guts, no sense and no vision”.
Dissents came from the hawkish as well as the dovish side with both Esther George of the Kansas City Fed and the Boston Fed’s Eric Rosengren pushing back against the cut, like they did in July, while James Bullard of the St. Louis Fed argued for a deeper move of 50bp.
Against these types of disagreements, Jay Powell’s press conference was always likely to be a tricky one, after all with the FOMC so split how could he give a solid steer on how future Fed policy was likely to play out over the course of the rest of the year.
As such there was no clear commitment to cut rates further this year, and given how recent data has played out why should there be, after all as President Trump keeps telling us the US economy is in good shape.
The statement wasn’t too much different from the July one with the only notable differences being references to weaker exports, a slight dig in Trumps direction perhaps, and slightly stronger household spending, which prompted the Fed to lower its GDP forecast ever so slightly from 2.2% to 2.1%.
As the press conference got under way it soon became apparent that while there was interest in when we might expect to see the next rate cut, the repo problems were of more immediate concern, with Powell saying that the situation was being monitored and addressed, though he did add that the size of the balance sheet may need to be increased if the need arose.
All in all, Powell managed to navigate his way through the press conference without any pratfalls to speak off, with stock markets finishing the day higher and US treasury yields more or less finishing the day where they started.
In contrast today’s Bank of England rate decision is likely to be a more mundane affair given the proximity of the Brexit deadline at the end of October. No changes are expected to monetary policy with the main focus expected to be on how it sees the UK economy evolving over the next few months.
With wage growth rising at close to 4% and inflation going the other way, the UK economy looks in much better shape than some of the recent data would appear to suggest. With “no deal” a much higher probability now than it was at the last meeting; the main focus is likely to be on what measures the bank might look to take in the event of such an outcome.
As far as the UK economy is concerned, the increasing gap between wages and inflation has helped put a floor under consumer spending over the last two months after a disappointing performance at the beginning of Q2. The last two months have seen a fairly decent recovery in UK retail sales with gains of 0.9% and 0.2% respectively, with estimates that we might see a bit of a slowdown in August, with expectations of a decline of 0.2% expected.
It always pays to be cautious when the UK consumer is concerned given that August tends to see a lot of pre back to school expenditure, which can lift overall sales volumes. It&rsquo s also worth bearing in mind that estimates for a decline in retail sales in July proved wide of the mark.
The Bank of Japan also left interest rates and monetary policy unchanged earlier this morning, though there was a suggestion that they might be inclined to do more next month if the economic environment didn’t improve with 2 out of the 9 policymakers voting for further action straight away.
The spike higher in oil prices continued to lose altitude yesterday after Saudi Arabia stated that the weekend attack was unquestionably sponsored by Iran, but crucially they didn’t say it had been carried out by them. Furthermore, the decision by President Trump to implement further economic sanctions on Iran appears to suggest that a military response has been ruled out for the time being.
This continued decline in prices reduces substantially the prospect of an oil price shock knocking the stuffing out of the global economy in the coming weeks and months, as prices slowly return to levels last seen at the beginning of last week.
EURUSD – while above support at the 1.0925 area the risk is for a rebound back to the 50-day MA now at 1.1130, which could retarget the August peaks at 1.1250. Below 1.0920 targets the 1.0800 area.
GBPUSD – last week’s break above the 50-day MA at 1.2280 has the potential to open up further strong gains towards the 200-day MA at 1.2740. We have support at the lows this week at 1.2380, while below that larger support at the 1.2280 area.
EURGBP – currently looking to try and push below the 200-day MA at 0.8840, with a break below the 0.8830 level opening up the prospect for further losses towards 0.8795 initially on the way to 0.8720. Resistance currently at this week’s high at 0.8902.
USDJPY – the US dollar appears to be gaining ground above the 108.20 level and could well head towards the 109.20 level. A move back below 108.20 would negate and argue for a return to the 107.50 area.
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