The next FOMC meeting is still several weeks away, but currency markets are already weighing up the possibilities of further cuts.
Wednesday’s US retail sales miss may be the clincher.
Foreign exchange markets and currency analysts are expecting cuts in October and December.
Markets are flattish in early Thursday trading as the momentum from the last few days is starting to wane in risk assets. Earnings season in the US is taking over from the trade war as the main driver of US indices and have been on the whole fairly positive. Banks put in a good string of results earlier in the week and Tech heavyweights will be buoyed by the Netflix report after the bell on Wednesday which catapulted the stock over 10% higher.
Cut Probabilities Increase
The lead in to the October 30th Fed meeting is also occupying the thoughts of many traders. Whether or not the Fed cut rates again in October is still a hot issue as the run of poor data keeps the possibility very much alive even though there have been no firm signals from the Fed. Fed speakers themselves have been sending conflicting messages with some more dovish than others and Chair Powell seemingly sitting on the fence waiting for more data and news on the trade war. If he wanted resolution on any of these before the October meeting then he will be disappointed. A trade deal is closer than it was and there are reasons to be optimistic, but data on the other hand has been a concern. Wednesday’s retail sales data may actually have been the decider.
“The disappointing run of US data has continued with today’s retail sales numbers for September, which posted the first decline for seven months. Rather than rise 0.3% month-on-month as expected, they actually contracted 0.3% with the report showing broad-based weakness. Just five of the 13 major categories within the report experienced an increase, namely furniture, health, clothing, miscellaneous and eating/drinking. Motor vehicles/parts fell 0.9%, gasoline stations sales fell 0.7%, building materials fell 1% and department store sales fell 1.4% (-7.3% year-on-year),” reported ING.
Retail sales have taken on new importance as consumers are one of the last things holding up the US economy. They contribute around 70% of US GDP and now that sectors such as manufacturing are contracting (seen by the recent ISM PMIs), if consumer data also slows the economy will really struggle. In light of the recent retail miss and softness in other areas, ING expect a further cut in October and one in December too.
“With the major business surveys such as the ISM and National Federation of Independent Business reports seemingly in freefall and investment lead indicators pointing to contraction, we expect to see the economy to experience sub 2% growth in 4Q19. Add in weaker global growth, the strong dollar and a nagging doubt about the imminent prospects of a meaningful de-escalation of trade tensions and we see the economy expanding just 1.3% in 2020.
Given this growth backdrop and the fact recent inflation indicators show signs of softening and the University of Michigan consumer inflation expectations series hit an all-time low, the Federal Reserve will be increasingly nervous about hitting its inflation target. We expect the Federal Reserve to follow up the July and September rate cuts with a further 25bp move in October and another in December.”
Despite all these mounting pressures, Powell has been tight lipped about the prospect of further cuts this year and there is still a large divergence between what the market and analysts expect and what the Fed says it is likely to do (mainly through its ‘dot plots’). With stock markets near all-time highs there is a lot of easing already priced in and if the Fed does not cut we could expect stocks to fall and the US dollar to make further gains.