The European trading session was uneventful yesterday, with the exception of a few corporate stories, as traders spent much of the session awaiting the Federal Reserve meeting.
As expected the US central bank cut interest rates by 0.25% to the range of 1.5-1.75%. Eight policymakers voted to cut rates while two central bankers voted to keep rates on hold.
Last night the Fed cut rates for the third time in four months, but it seems like the Fed could be in for a period of sitting on their hands and allowing the interest rate cuts to trickle down to the economy. Jerome Powell, the head of the Fed, said ‘the current stance of monetary policy is likely to remain appropriate’. The update from the Fed suggested rates won’t increase until inflation ticks up. Seeing as the unemployment rate in the US in at a fifty year low, you’d image after three rate cuts of 0.25%, now would be the time to cool it on the cuts.
The move by the Fed should take some of the pressure off Mr Powell in relation to President Trump’s outbursts on Twitter. The US president has been demanding the Fed lower interest rates in a bid to drive down the value of the US dollar – to make US exports more competitive. It is possible the move by the Fed last night might pave the way for other central banks around the globe to follow suit, so Mr Powell might not be out of the woods yet as far as far as Trump is concerned.
The S&P 500 closed at a record-high as the rate cut helped boost sentiment. Earlier in the session the advance reading of US third-quarter GDP showed the economy grew by 1.9%, which easily topped the 1.6% forecast. With a respectable level of growth, it makes you wonder why the Fed lowered rates in the first place. The news from the US was not all bullish, the ADP employment report showed that 125,000 jobs were added this month. The September figure was revised down to 93,000 from 135,000 – it might be a sign the US jobs market is losing steam.
The US dollar index initially jolted higher on the back of the Fed announcement, but then pushed lower, which gave a lift to GBP/USD as well as EUR/USD - which should please President Trump. The softness in the greenback also lifted gold, but the metal failed to breach the $1,500 mark.
Overnight, the final reading of Chinese manufacturing and non-manufacturing came in at 49.3 and 52.8 respectively, while economists were expecting 49.8 and 53.7 respectively. The manufacturing sector remains in contraction, while the non-manufacturing industry is registering small growth.
US-China trade talks will still continue despite the cancellation of the APEC summit in Chile next month. The event was supposed to act as neutral ground for Donald Trump and Xi Jinping, but the trade negotiations will still be maintained.
At 7.45am (UK time), the French CPI rate will be posted and economists are expecting 1%, which would be a decline from the 1.1% level in September. It is worth noting the German CPI rate held steady at 0.9% yesterday.
The eurozone CPI rate, the growth rate as well as the unemployment level will be posted at 10am (UK time). Headline CPI is expected to cool to 0.7% from 0.8%, but the core reading is tipped to remain at 1%. Economists are expecting the unemployment rate to stay at 7.4%. On an annual basis, third-quarter GDP is anticipated to be 1.1%, while on a quarterly basis it is expected to be 0.1%.
The core PCE reading is the Fed’s preferred measure of inflation so when the report is posted at 12.30pm (UK time), it will be closely watched. The reading is expected to slip to 1.7% from 1.8%. Last night the Fed hinted that rates won’t go up unless inflation goes up, so a fall in the level should push back the possibility of a hike. The jobless claims report is expected to be 215,000.
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