Fed and BoE set to cut rates

The so-called ‘Trump trade’ ramped up yesterday following the decisive outcome of the presidential election, with US equity markets making sizeable gains, US bond yields rising sharply, and the dollar strengthening across the board. The currency is off its best levels this morning, ahead of the Fed’s interest rate decision later today, trading at around $1.0770 and $1.2940 vis-à-vis the euro and sterling respectively. The single currency has slipped a little further against the pound, to around £0.8325, with the Bank of England (BoE) due to announce its latest interest rate decision today too.

The spike in US government bond yields saw 10-year yields end the day around 15bps higher at a circa 4-month high of just over 4.40%, while 2-year yields rose by just shy of 10bps to 4.25%. In contrast, German yields were lower on the day, with 2-year yields falling the most (-12bps), while UK yields ended broadly flat.

In equity markets, the S&P 500 closed at a new all-time high on the back of gains of around 2.5%, while the Dow Jones rose by about 3.5%. In contrast, European equity markets ended lower on the day, shedding around 1.5%.

Attention today will be on the Fed and BoE rate announcements. In the case of the Fed, while the US economy continues to grow at a sold pace, inflation has fallen and the labour market is cooling, which should allow it to cut rates again, probably by 25bps (to a range of 4.50-4.75%) following September’s 50bps reduction. Similarly for the BoE, falling headline and core inflation, along with moderating wage growth, should see it cut rates by another 25bps, taking Bank Rate to 4.75%

Economic data due today include weekly jobless claims and productivity & labour costs in the US and retail sales in Euro area. A number of ECB members are due to speak over the course of the day as well.