With the Fed announcing a larger 0.50% interest rate cut and suggesting more easing to come, how did financial markets react to the news?
Did we see a uniform reaction among major asset classes or did other headlines take the spotlight?
Check out the latest market updates!
Headlines:
- NZ current account deficit in Q2 widened from upgraded 3.83B NZD (previous 4.36B NZD shortfall) to 4.83B NZD (3.95B NZD deficit expected)
- BOC official Rogers said that core measures of inflation should decline and that policymakers want to see more progress
- Japanese core machinery orders fell 0.1% m/m (0.4% expected, 2.1% previous) in July
- Japan’s trade deficit narrowed from 0.68T JPY to 0.60T JPY (0.96T JPY forecast) as a weak yen inflated the value of imports, exports rose 5.6%
- Australia’s MI leading index dipped 0.1% in August (previous flat reading)
- API: Private oil inventories rose 1.96M barrels (-0.1M expected)
- U.K. August headline CPI (2.2% y/y) and core CPI (3.6% y/y) print as expected; Services inflation ticked back up from 5.2% to 5.6%
- Eurozone final headline and core CPI unchanged at 2.2% and 2.8% year-on-year in August, respectively
- EIA crude oil inventories down 1.6M barrels (-0.2M forecast,+0.8M previous)
- U.S. building permits rose from 1.41M to 1.48M, housing starts up from 1.24M to 1.36M in August
- BOC Summary of Deliberations noted weaker household spending and residential investment, rising unemployment
- FOMC lowered interest rates by 0.50% in 11-1 vote, dot plot forecasts suggested additional 0.50% in cuts for 2024
- Fed lowered estimates for headline and core inflation this year while revising jobless rate forecast higher from 4% to 4.4%
- During the presser, Fed Chairperson Powell reiterated their commitment to price stability but also mentioned that they have to address labor market risks
Broad Market Price Action:
Dollar Index, Gold, S&P 500, Oil, U.S. 10-yr Yield, Bitcoin Overlay Chart by TradingView
Financial markets seemed to be extra jittery during FOMC day, as there was no “calm before the storm” during the earlier trading sessions.
Crude oil was off to a weak start, returning most of its gains from the previous New York session, and sinking back to the near-term support around $68.65 per barrel when the API reported a surprise build of 1.96M barrels in private oil inventories. Still, the energy commodity pulled higher when U.S. markets opened and got an extra boost from a larger than expected reduction of 1.6M barrels in EIA crude oil inventories.
Treasury yields were edging higher during the London session, as investors were probably lightening up on their bond holdings, before dipping sharply on the Fed’s decision to reduce U.S. borrowing costs by 0.50%.
Gold popped up after the announcement, but the gains were quickly reversed when main man Powell dampened hopes of more aggressive easing moves in the near-term.
U.S. equity indices were cruising carefully ahead of the FOMC announcement, and the larger than expected rate cut appeared to spark a brief risk rally. However, indices quickly returned their post-FOMC winnings to close marginally in the green for the day.
FX Market Behavior: U.S. Dollar vs. Majors:
Overlay of USD vs. Major Currencies Chart by TradingView
The dollar started the day in the red against its forex counterparts, particularly versus the yen which got a boost from better-than-expected Japanese trade data. As it turned out, the country’s trade deficit narrowed even after a depreciating currency inflated the value of imports, thanks to an impressive 5.6% pickup in exports – its ninth consecutive monthly gain.
The Kiwi was also off to a good start despite a weaker than expected current account balance, edging further north versus the dollar during the London session, before retreating as U.S. markets opened.
The rest of the major currencies appeared to trade in wider than usual ranges leading up to the FOMC decision, which then sparked a sharp selloff for the U.S. currency across the board. After all, Fed policymakers announced a jumbo 0.50% rate cut, an easing move not seen since the height of the financial recession in 2008, and the dot plot forecasts confirmed more interest rate cuts for the rest of 2024.
However, the U.S. dollar soon bottomed out and rebounded to its pre-FOMC levels (and higher!) when the presser took place, as Fed head Powell seemed to downplay expectations of more 0.50% cuts down the line and reassured that the economy remains strong. Still, the Greenback ended slightly lower against majority of its peers at the end of the session, except against the Loonie.
Upcoming Potential Catalysts on the Economic Calendar:
- Australia’s employment report at 1:30 am GMT
- Swiss trade balance at 6:00 am GMT
- Swiss SECO economic forecasts at 7:00 am GMT
- BOE monetary policy decision at 9:00 am GMT
- U.S. initial jobless claims at 12:30 pm GMT
- U.S. Philly Fed index at 12:30 pm GMT
- U.S. existing home sales at 2:00 pm GMT
- U.K. GfK consumer confidence at 11:00 pm GMT
- Tokyo core CPI at 11:50 pm GMT
Now that the September FOMC decision is over, are markets about to hit the snooze button and call it a day? Probably not!
There’s no shortage of top-tier events in today’s economic schedule, starting from the release of Australia’s August jobs report during the Asian session, followed by the BOE monetary policy decision during London market hours. To top it off, we’ve got Uncle Sam’s weekly initial jobless claims figure and Philly Fed index, which tend to spur intraday USD volatility.
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