Friday, September 27, 2019

Markets slip as political drama dominates US headlines; will the Fed cut rates again?

  • Dollar
  • Gold
  • Euro
  • Stocks

Market recap: Impeachment talk sees US equities tumble

US equities fell yesterday, as talk of US president Donald Trump, phone calls to the Ukraine and a whistleblower report dominated the news. Meanwhile, the US China trade war created conflicting headlines. While it was reported that China is willing to buy more US products, it was also claimed the US is unlikely to extend a waiver that would allow US companies to supply tech made by Chinese firm Huawei. The DJIA fell 0.30%, the S&P 500 slipped 0.24% while the Nasdaq retreated 0.58%. The Dollar Index rose 0.18% on the news while gold and yen saw little change.

Strong Q2 Personal Consumption Expenditure (PCE) data in the US highlighted a robust US economy and a strengthened dollar. As a result, the euro hit a new two-year low against the greenback, reaching 1.090’s level.

Today’s Analysis: Will robust inflation limit the chances of a Fed rate cut?

Q2 PCE data released on Thursday surpassed expectations, as prices grew 2.4% quarter-on-quarter, while Core PCE (PCE data excluding food and energy) rose 1.9%. PCE data for August is released at 4.30pm (GMT +4) today.

Core PCE is one of the key indicators of the economy that the Fed uses to decide its monetary policy, and is a way to measure inflation. The Fed will most likely leave rates unchanged in October, with its Core PCE for Q2 beating expectations and rising close to 2% (which is the Fed’s target inflation rate). According to the CME Group’s futures tracking, the consensus now is the Fed will leave interest rates unchanged at its next meeting in October. The chances of a rate cut reduced from 53.4% to 48% after the data was released.

The Fed: Why future chances of a rate cut are diminishing

The likelihood of a rate cut will be even lower if Core PCE data for August meets or beats analyst expectations of 1.8%. In addition, durable goods and consumer sentiment data (from the University of Michigan) is also released today, and will also influence the likelihood of a rate cut.

As chairman Jerome Powell has signaled the Fed will take a more data-driven approach in the future, recent data reaffirms our forecast of no additional cuts this year. With the market still split over the chances of a rate cut, the dollar is likely to show movement later this afternoon. We’re expecting a strong Core PCE in August, but with mixed data on consumer sentiment and durable goods set to be released later in the afternoon, we believe the chances of a rate cut are now below 40%. As a result, we expect the Dollar Index to rise to 99.50’s level from its current 99.10’s level.

This inevitably would affect the euro, which already hit a two-year low today against a stronger dollar, thanks to better than anticipated Core PCE data. As the dollar rises, we expect the euro to slide against it, possibly dropping to 1.090’s level depending on consumer and business sentiment data scheduled to release at 1pm (GMT +4) later today.