Fed rate decision today
The Fed is certain to (finally) lower interest rates following the conclusion of today’s meeting, the only question is whether it will cut by 25bps or 50bps. Up until late last week, the market was convinced that a quarter-point reduction was most likely. Since then however it has been steadily raising the chances of a 50bps move which it now puts at almost 50/50, hence uncertainty about the outcome is unusually high. There’s also a risk that the Fed may disappoint current expectations regarding the likely scale of rate cuts ahead, with the market pricing in a reduction of around 250bps between now and the end of 2025. Ahead of the rate announcement, the euro and sterling are both little changed against the dollar from yesterday morning trading at around $1.1125 and $1.3190 respectively, leaving EURGBP at around £0.8435, with UK inflation data released earlier, which were in line with expectations, having little impact on the pound.
Government bond markets have been relatively clam so far this week as they await the outcome of the Fed meeting, with yields edging marginally higher yesterday. In equity markets, European stocks advanced by 0.7%, more than reversing Monday’s decline, while US indices ended broadly flat on the day.
Regarding this morning’s inflation data in the UK – which were in line with the consensus forecast – the headline rate remained at 2.2% in August, with a decline in goods inflation further into negative territory (to -0.9%) offsetting a rise in services inflation (to 5.6%), the latter due largely to a sizeable increase in air fares last month. The market has pared back a little further the already very slim chances of a rate cut from the Bank of England tomorrow (that’s still expected to come in November).
Yesterday’s economic data in the US were slightly firmer than expected with both retail sales and industrial production increasing in August (albeit the former marginally so). Incorporating these latest data, the Atlanta Fed puts the run-rate for GDP growth in Q3 at a very solid 3%, in line with the actual Q2 outturn.
On the economic data front today, construction output and a final estimate of inflation in August are due in the Euro area, while housing starts & building permits are scheduled in the US.