Fed stays on hold, ECB to do likewise
The Fed left interest rates unchanged in a range of 3.75%-4% following yesterday’s meeting, as expected, though two (of 12) members voted for a 25bps increase. The accompanying policy statement noted that the “accumulation of more information will help the Committee determine the policy stance appropriate to ensure a timely return of inflation” to the 2% target, suggesting a rate increase may be in the offing at the next meeting in December. Rate hike expectations were pared back a touch following the meeting, albeit only to around the levels that prevailed at the end of last week, with the market still almost fully pricing in a 25bps increase in December and the best part of 75bps of hikes in total over the next year or so. The dollar fell immediately post-meeting but has clawed back some ground since. Yesterday’s Budget in the UK was a low-key affair, eliciting little reaction in markets, probably just as the Chancellor wanted. The focus now turns to today’s ECB meeting. It is also expected to keep interest rates on hold (at 2.5%), but with oil and gas prices currently running somewhere between the Bank’s ‘adverse’ and ‘severe’ scenarios, and the attendant implications for inflation, another increase in rates seems likely at the final meeting of the year in December. The situation in France is likely to feature large at today’s post-meeting press conference. Ahead of the meeting, the euro is trading at around $1.1140 and £0.8365 against the dollar and sterling respectively. The pound has moved back above the $1.33 level against the dollar, to around $1.3315.
US short-dated bond yields ended lower on the day, while 10-year yields finished higher, but overall the moves were quite small. German yields were higher across the curve, but again the moves were modest, while UK bond yields were unchanged to slightly lower post-Budget. In equity markets, US and European stocks chalked up small gains, but European indices are a touch lower at the open this morning following mixed corporate earnings after the US close, with Microsoft beating expectations but Alphabet falling shy of forecasts.
Following yesterday’s policy meeting, the Fed Chair, Kevin Warsh, said that “inflation is too high…energy and related prices have moved higher again in recent weeks…and our job is to ensure that relative price changes in some sectors do not broaden out across the economy”. He also said that “while overall financial conditions are tighter, I’m unwilling and unable to call them tight.” With the policy statement noting that “the accumulation of more information will help the Committee determine the policy stance appropriate” to meeting the 2% inflation target, another increase in interest rates (following September’s 25bps hike) seems likely at the Fed’s next meeting in December.
The UK budget was small in scale, designed to provide “breathing space” for households and small businesses, with a modest loosening of fiscal policy in the near-term (via spending increases and tax reductions) and a modest tightening of fiscal policy over the medium-term. This sees the budget deficit fall from an expected 4.2% of GDP in financial year 2026-2027 to just under 2% in in FY 2030-2031, while the debt-to-GDP ratio stabilises at just under 100% over the latter part of this period. In terms of the nearer-term outlook for GDP growth and inflation, the former is forecast to average 1.2% this year and 1% next year, while (CPI) inflation is forecast to average 3.1% in 2026 and 3.4% in 2027, before falling to 2.1% in 2028.
As well as the ECB meeting, there is quite a heavy schedule of economic data due today, including Q3 GDP and September PCE inflation in the US. The US economy is expected to have expanded by around 0.8% quarter-on-quarter in Q3, or an annualised rate of growth of just over 3.0%, according to the consensus forecast, while headline and core PCE inflation are both expected to have nudged up last month, to 3.6% and 3.1% respectively from 3.4% and 3.0% in August, both well above the 2% level. The European Commission’s Economic Sentiment Indicator for October is due in the Euro area, while mortgage lending/approvals for September are scheduled in the UK.