Thursday, October 31, 2019

Fed’s monetary policy decision meets investors’ expectations, but how will they react to today’s economic data?

  • China
  • Dollar
  • Gold
  • Euro
  • Pound
  • Stocks

Market recap: Fed gives hawkish signals after 25bps rate cut

US equities reached new highs yesterday, after the Fed announced a 25bps interest rate cut. Fed Chairman Jerome Powell signalled in a press conference that the Fed could pause monetary policy changes in the short-term. The DJIA rose 0.43% to 27,186.69, the S&P 500 gained 0.33% to 3,046.77 and the Nasdaq advanced 0.33% to 8303.98. The Dollar Index retreated slightly after the news, falling 0.05% to close Wednesday’s trading session at 97.65.

Facebook shares surged approximately 4% in after-hours trading, thanks to a better-than-expected earnings report. The social media giant revealed a third consecutive increase in quarterly sales growth, along with steady user growth.

Meanwhile, gold increased 0.53% and the yen gained 0.04% against the greenback as demand for safe haven assets increased. US Treasury yields fell across the board, with two-year yields losing 4bps to 1.60% and 30-year yields falling 8bps to 2.25%.

The Bank of Canada kept its interest rates unchanged at 1.75% but cut its growth outlook for the second half of the year due to the ongoing US-China trade dispute and a weakening energy sector. CAD/USD fell by 0.55% on Wednesday as a result.

Meanwhile in Asia, equities rose on Thursday morning after the Fed rate cut. The Nikkei, Hang Seng Index and the Straits Times Index started Thursday’s trading session 0.29%, 0.15% and 0.30% higher.


Today’s analysis: Will upcoming economic data hint towards future rate cuts?

September’s Core Personal Consumption Expenditure (Core PCE) Price Index and Personal Spending datasets for the US will be released today at 6.30pm (GMT +4). Analysts are expecting Core PCE to increase 1.7% in September year-on-year and Personal Spending to increase by 0.2% from August.

Core PCE Prices for Q3 this year beat expectations of a 2.1% quarter-on-quarter increase, rising 2.2% instead. Also, Employment Change by Automatic Data Processing (ADP) for October beat estimates by 3,000, increasing 125,000 from a previous level of 93,000. GDP for Q3 grew at a rate of 1.9%, which was higher than the expected 1.6%.

The recent positive economic data suggests the US economy may be starting to benefit from the two 25bps Fed rate cuts earlier this year. We expect that September’s Core PCE will similarly slightly beat expectations, remaining at 1.8%. But Personal Spending is likely to meet expectations at 0.2%.

As the Fed adopts a more hawkish tone, expect the market to view upcoming economic indicators as guidance on when to expect the Fed to change its tone. Currently, Fed futures imply that the market is pricing in a greater than 50% probability of a rate cut only from April onwards. If economic data continues to beat expectations, the implied probability for a rate cut will likely continue to reduce in the short-term.

As September’s Core PCE is likely to slightly outperform the current consensus, expect the dollar to only strengthen slightly against major currencies. The Dollar Index may rise to 97.42’s level as a result. But it may drop to 97.26’s level if Core PCE falls short of expectations.

Will the dollar strengthen across currencies if Core PCE beats expectations?

The dollar will also be affected by news of the US-China trade war. Chile has cancelled the Asia Pacific Economic Cooperation Summit, which was originally scheduled for November 16th and 17th (due to violent protests), meaning it is unclear if the two superpowers will announce a new deadline for the signing of the first phase of a trade agreement. The greenback will likely be more impacted by news on US-China relations instead.

Dollar bears apply more downward pressure after the Fed's 25bps rate cut (H4)

Bears rejoiced after the Fed cut interest rates, pushing the Dollar Index below 97.42’s level. They will likely try to retest the 97.26 support level and possibly push past it if September’s Core PCE disappoints.