UK set to head to General Election on December 12th
Market awaits FOMC decision tonight
US Q3 GDP beats estimates but declines from previous quarter
If this October has not brought any significant developments to the macro picture, it will certainly be remembered as the month of "chair change". After last week arrivederci to Mario Draghi, today signs UK Speaker of the House Bercow last PM Questions after a decade of service in the House of Commons. In terms of Brexit updates, after MPs approved the request for a general election in December, we will be awaiting confirmation form the House of Lords by end of today. Looking across the ocean, tonight the FED is expected to deliver the third 25bp interest rate cut for this year. With the interest rate decision fully priced in, the bigger focal point will be on the message the FED wants to send. Looking at the last meeting and cut in September, the bank highlighted "implications of global developments and subdued inflation" as the main reasons behind their decision. Relative to the US domestic outlook, the bank pointed out "although household spending has been rising at a strong pace, business fixed investment and exports have weakened." Today's third cut would be in line with the FED "insurance cut" guidance provided at the start of this cutting cycle and also in line with historical similar stances. In fact the last time the FED reduced rates three times while the economy was growing, i.e. insurance cuts, it was in 1998 and after the third cut, it announced that a 75 basis point "was reasonable" to sustain expansion. However, today's environment is very different than 1998 and perhaps it might be a bit premature to communicate the end of this cutting cycle considering the recent (mild) deterioration of US data and the persistence of external geopolitical tensions. Therefore, expectations remain in favor of the FED reiterating their willing to "act as appropriate to sustain expansion", thus leaving optionality for further cuts on the table as they await the outcome of a few event risks related to trade policy and take time to assess incoming data.0 In light of the recent September meeting dissenters (two voting for unchanged and one for a deeper 50bp cut), it is likely to be harder for the FED to cut if incoming data remains relatively solid. However, prior the black out period, we have not seen any explicit intention to talk down market dovish expectation.Looking backwards, this would mean Powell playing along Greenspan playbook who cut rates three times in middle cycle adjustment in 1995-1996 and 1998 to counter risks. Moreover, September forecasts showed the FOMC interest rate hitting the bottom this year before 2021. As a reminder, this meeting will not present the Stuff Economic Projections and dot plot, which will be part as for usual of the December Quarterly meeting. Therefore, given the FED members division, softening of geopolitical tensions and relatively stable data my base case expectations will be for a cut without pre-commitment - which could initially disappointment dovish expectations for a December cut. However, Powell massaging of expectations and reminder of cuts optionality - perhaps during the Q&A - should be enough for markets to get on with it. Net net, I am expecting a relatively choppy reaction with limited opportunities.
_______________ EU Close
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