Thursday, 31st October 2019 10:38 - by Shant
Apart from the 25bp cut in the Fed funds rate, the FOMC meeting was a little short of anything else we didn't know. The US economy is coming off the boil and in order to maintain the pace of growth seen earlier in the year, the FOMC has decided to get ahead of any material weakness and provide a little more accommodation. Markets were widely anticipating this move, with the Fed also cutting the interest rate on excess reserves by 25bps also to 1.55% - with Fed Funds now at 1.75% - a total of 0.75% cuts this year. Judging by the press conference, this may be the Fed's lot for this year, and especially so with familiar dissenters Rosengren and George calling for rates to stay on hold. That said, the market did not see it that way.
When we look at cross-asset market activity, there are some alignments that seem to be falling into place, and one such signal is coming from the currency markets. The Dollar has been on the front foot for most of the year, but despite an initial dip on first reaction to Fed chairs press conference, we saw a turn lower as market participants looked past the verbiage and start to consider the economic impact, not only of the trade tensions and uncertainty but also due to the data which has softened in recent sessions. We could have expected a less positive response from US stocks, but after some hesitation, equities also moved in line with the view that there are more rate cuts to come. In light of this, and also heightened expectations that the US and China will sign off the 'Phase 1' deal next month, we saw a move back higher again with the S&P 500 making new record highs this year.
Indeed, Fed Chair Powell mentioned some alleviation in the downside risks represented by not only the US/China trade spat but also the developments in Brexit, which although not resolved, had opened the door to some eventual progress, even if it does not come to pass until early next year. Clearly, the Fed has been mindful of global events and the rhetoric at the press conference last night reflected this. So there is a fair assumption to make; that if the trade talks cannot pass to an eventual resolution, the Fed will step in. This is the take-away we can make from last night's events. When you consider some of the easing measures undertaken in weaker economies elsewhere, one has to look at the level easing seen this year. 75bps is not an insignificant amount for an economy which is enjoying low unemployment, and quarterly growth rates close or at 2.0% - based on the past 2 quarters.
So naturally, now that the Fed has 'delivered', attention will reassert itself back onto the US trade talks. 'Phase 1' will effectively be an undertaking to maintain dialogue which will hopefully and ultimately lead to a de-escalation in the trade war which has manifested itself in the exchange of tariffs. Bearing in mind that the longer these levies remain in place, global demand - which is essentially the weak point in the global economy - will be negatively affected. Only last night we got the latest Chinese PMIs for manufacturing, which saw the index lowered from 49.8 to 48.3, and while this is not a major drop, it still highlights the slow and (obviously) painful drag this is having on trade. Business investment has been hampered worldwide, and the sooner these tariffs can be lifted, the sooner we can return to a period where a degree of certainty can return the flow of business to more familiar levels.
The latest on from China is that unless all the tariffs can be removed, then a complete resolution (with the US) is unlikely. Many believe that China is playing the long game, waiting for a change in the White Administration and its hitherto combative policy stance. This puts the pressure on Donald Trump going into the elections next year, where he will be hoping the US economy is in as good a place as it is now - at the very least. Stock markets - for now at least - continue to warm to the idea that as economic effects starting filtering through in both China and the US, then both sides will have no option but to ease up on their respective red lines. At least now we know that Fed Chair Powell is ready to step in, even if it is not with the complete backing of the FOMC.
The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.