The Fed duly delivered what everyone was expecting, cutting rates by 50bp down to 1%, the joint lowest rate for half a century. There was some expectation that the rate may be cut by a larger amount, and although this didn't happen, the statement did point to the global slowdown and the credit crunch having a negative impact on consumer spending and industrial production, which will bring 'inflation to moderate in coming quarters to levels consistent with price stability'; this statement is being seen as dovish, with a further 25bp cut expected next month. The rate cuts weren't just in the US, with China also cutting rates by 27bp, and Norway following suit with a 50bp cut.
With the Fed fulfilling most of the markets expectations the trend of the last couple of days continued with the Dollar giving up some of it's strong gains from the past few weeks, allowing the Euro to climb above 1.32, and the Pound to above 1.65 against the US Dollar. The Yen also continued to weaken allowing the Australian Dollar to climb above JPY65 (a 10% climb in 2 days), and the Pound to rise above JPY163. Sterling has actually lost ground against the Euro falling 1c cent lower to sit around 1.26.
The rate cuts in general, and particularly those in China, have led to a surge in the price of commodities with Nickel jumping over 14%, copper up over 12%, and crude oil up 8.5%. The resurgence of market sentiment (the FTSE had it's 3rd largest gain yesterday), is likely to continue at least up to the next weeks rate cuts by the BoE and the ECB, however the fundamentals in the market do not really support the move higher, so as the optimism starts to fade the currencies are likely to continue their previous trend. David Blanchflower gave a speech last night, and didn't miss the chance to say I told you so to his MPC colleagues. Blanchflower has consistently voted for rate cuts, even while his fellow members were thinking of rate hikes, however at the time inflation did seem to be a problem and if Blanchflower did predict the recent wave of banking crisis then he should have let the rest of us know.
We've already had the UK's data release for today with the Nationwide House Price survey showing house prices falling by slightly less than expected. The other data is the usual month end survey's out in the Eurozone, expected to show a further softening in the economy, and US GDP figures, which are predicted to show a 0.5% annualised fall in Q3. With the central banks acting strongly, the economy data may not shake the markets too much, however as the bad data rolls in, it adds up to an ominous barrage of figures.
Michael Corcoran | Treasury Solutions | nabCapital