The US session started with the BOE cutting rates by 25 basis points as expected and ended (or close to it) with the FOMC cutting rates by 25 basis points also as expected.
BOE Bailey said in his press session:
Bailey noted that while the disinflation process is progressing faster than anticipated, services inflation still needs to decline more broadly. Bailey acknowledged that wage inflation pressures may persist beyond current forecasts and emphasized the importance of understanding the inflationary impact of the recent budget. However, he cautioned against assuming that the budget would significantly alter the path of interest rates, indicating that market conditions remain orderly.
Bailey stated that the Bank of England does not have a specific equilibrium interest rate in mind, and he does not expect rates to return to very low levels unless an unforeseen shock occurs. The BOE will evaluate market interest rates at the December meeting to determine any necessary policy adjustments. He also highlighted the risks associated with global economic fragmentation, acknowledging the uncertainties and the need for a careful approach to these external threats.
Bailey reiterated the use of “gradual” when discussing potential rate cuts but avoided specifying its meaning due to ongoing uncertainty. While inflation is lower than projected a year ago, he emphasized the continued risks from geopolitical and external shocks. Bailey assured that if disinflation persists, the BOE will adjust policy accordingly. He also noted that while improved labor market data from the ONS would aid decision-making, the BOE must continue managing policy with the available data. Downside surprises in inflation could potentially accelerate rate cuts.
Meanwhile, FOMC’s Powell kept the recalibration of rates theme alive. In hiis press conference
Fed Chair Jerome Powell emphasized the Fed’s commitment to achieving maximum employment and price stability, noting attentiveness to risks on both sides of the mandate. He acknowledged that recent hurricanes and strikes affected jobs in November, and while wage growth has eased and unemployment remains low, the labor market is now less tight than it was pre-pandemic, reducing inflationary pressures. Powell highlighted that overall inflation has moved closer to the Fed’s target, though core inflation remains somewhat elevated. The Fed remains committed to maintaining economic strength, with the flexibility to either slow policy adjustments if inflation remains high or lower rates quickly if employment weakens.
In the Q&A, Powell discussed the recent rise in bond yields, noting that the Fed is monitoring this but does not see bond rates as directly influencing policy decisions at this stage. He attributes the yield increase to reduced downside risks and stronger growth rather than inflation concerns. Recent data has been stronger than expected, with some downside risks diminishing, and Powell expressed optimism about economic activity. However, one recent inflation report was slightly disappointing, and the latest jobs report was weaker than anticipated, though not alarming.
Powell noted that policy remains restrictive but effective, with the labor market gradually cooling and achieving balance. He stated that further cooling is not necessary to meet the Fed’s goals and that there is no change in the Fed’s approach, despite the removal of a phrase about “gaining greater confidence.” Looking forward, the Fed intends to move carefully, especially as it approaches a neutral rate, which Powell acknowledges is difficult to pinpoint. The Fed’s baseline for next year involves gradually moving rates toward neutral, with an emphasis on being cautious to avoid policy missteps.
Finally, when pressed if he would resign if asked by Pres-elect Trump, he said sternly “No”
The chance of a 25 basis point cut by the Fed in December is 75% for and 25% for no change.
The USD moved lower today erasing some of the gains seen during yesterday’s sharp move higher. Versus the major currencies, the greenback saw declines of:
- EUR -0.69%
- JPY -1.11%
- GBP -0.82%
- CHF -0.48%
- CAD -0.55%
- AUD -1.67%
- NZD -1.43%
The lower dollar was helped by yields moving lower as well:
- 2 year yield 4.1999%, -6.9 basis points
- 5 year yield 4.173%, -9.8 basis points
- 10 year yield 4.327%, -9.8 basis points
- 30 year yield 4.533%, -6.6 basis points
The broader US stock indices continued their run to the upside. The S&P and NASDAQ index closed at new record levels, and are up three days in a row. The Dow industrial average average which had its largest percentage rise yesterday going back to November 10 (rose 3.57% yesterday), close fractionally page lower.
- Dow industrial average is closing unchanged at 43729.34. It is up 4.63% over the last three trading days
- S&P rose 0.74% to 5973.10. The index is up 4.56% over the last three trading days
- Nasdaq rose 1.51% to 19269.46. The index is up 5.99% over the last three trading days days.
US initial jobless claims is expected at 221K underscoring the steady/solid US jobs market.
US labor costs for the third quarter rose by a larger than expected 1.9% vs 1.0% expected. Moreover, the prior quarter was revised higher to 2.4%. Productivity came in with a solid 2.2% rise vs 2.1% last quarter.