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London Quick Take – 17 September – Investors on watch as Fed set to cut rates
Neil Wilson
Investor Content Strategist
Note: This is marketing material. This article is not investment advice, capital is at risk.
On those retail sales figures - +0.6% MoM in August. the Atlanta Fed's raised its estimate for Q3 real GDP growth rate from 3.1% to 3.4%, while the estimate for real consumer spending was revised up from 2.3% to 2.7%. My belief is that the case for monetary easing right now is far weaker than the market seems to imply.
Anyway, although I think the market is way too complacent about the cut and the odds are closer to 50/50, on balance I think it is likely we are going to see a rate cut. I looked at some of this here.
The implications of what happens next are kind of unknown – does it the Fed lean into the market saying it cuts three times this year? Or is it more hawkish. My colleague John Hardy says it’s “hard to impossible to come up with any hawkish scenario for Fed policy for the next 12 months”.
Little wonder then that the dollar is being pressured lower. DB says investors are seeking hedging for US equity and bond investments, saying foreign investors want US assets but not the US dollar exposure. I looked at this topic a few months ago.
The dollar is decidedly on the back foot ahead of the Fed, particularly against a resurgent euro which has made a new cycle high above 1.1870, its strongest in 4 years. Front-end yields are pushing lower with the 2yr Treasury at about a 3yr low of 3.5%
FOMC preview key points
Trump visits Britain bearing gifts – hot on the heels of Alphabet announcing a £5bn investment in the UK, Nvidia, Microsoft and other tech giants are also piling billions into the country in AI investments. MSFT alone will plough an additional $30bn into the UK. Nvidia will put $15bn in with partners Nscale and CoreWeave. Meanwhile, GSK says it will invest $30bn in the US. It’s called trade, Trump style. Trump and Starmer are set to announce a new deal to collaborate on AI, quantum computing and nuclear technologies. It’s all going to require a tonne of energy. Good news for the government to hide behind but more worrying is the OBR revising UK productivity down, which squeezes the chancellor's headroom even further.
Meanwhile, data shows inflation is ticking along at 3.8% - staying at its highest in a year and a half. No great shakes but there are some signs of cooling in core and services inflation, the latter sliding to 4.7% from 5% ... nothing to move the needle on this week’s Bank of England meeting, however. It leaves November up for debate as well – the quarterly pace of cuts anticipated may just get stretched out a month to December. Anyway, for sterling it’s the dollar that is the key driver right now, though sticky inflation can help keep sterling bulls on the front foot.
The FTSE 100 was basically flat early doors with some gains for Centrica, Admiral, Entain and Babcock offset by the miners as precious metals took a bit of a bath. Fresnillo, Endeavour Mining, Anglo American and Rio Tinto were the main fallers among the blue chips on Wednesday morning. The DAX is firming up after a poor day Tuesday but momentum seems to be with bears as it appears to break down at the early August lows.
Key Points
- Nvidia, Microsoft and other tech giants announce $40bn investment in UK
- Fed set to cut rates but markets on edge over future path of monetary policy
- UK inflation holds steady at 3.8% but services inflation eases
- Euro hits multi-year vs dollar ahead of Fed decision
Zeitgeist: trade war ending + rate cuts resuming = bulls roaming free: can this narrative survive after the Fed?
Dollar + Treasury yields at lowest in over three years, gold and stocks at record highs...a lot is priced in so what will give first?
Reasons not to cut are plenty – retail sales data was gold, inflation is above target and rising, the jobs market is not in bad shape (breakeven point we discussed yesterday) despite what the headline numbers indicated, and markets are at record highs. Reasons to cut are more obvious – lower coupon payments on short-term bills to be rolled over in the coming months, plus signs of cracks in the jobs market.
Reasons not to cut are plenty – retail sales data was gold, inflation is above target and rising, the jobs market is not in bad shape (breakeven point we discussed yesterday) despite what the headline numbers indicated, and markets are at record highs. Reasons to cut are more obvious – lower coupon payments on short-term bills to be rolled over in the coming months, plus signs of cracks in the jobs market.
On those retail sales figures - +0.6% MoM in August. the Atlanta Fed's raised its estimate for Q3 real GDP growth rate from 3.1% to 3.4%, while the estimate for real consumer spending was revised up from 2.3% to 2.7%. My belief is that the case for monetary easing right now is far weaker than the market seems to imply.
Anyway, although I think the market is way too complacent about the cut and the odds are closer to 50/50, on balance I think it is likely we are going to see a rate cut. I looked at some of this here.
The implications of what happens next are kind of unknown – does it the Fed lean into the market saying it cuts three times this year? Or is it more hawkish. My colleague John Hardy says it’s “hard to impossible to come up with any hawkish scenario for Fed policy for the next 12 months”.
Little wonder then that the dollar is being pressured lower. DB says investors are seeking hedging for US equity and bond investments, saying foreign investors want US assets but not the US dollar exposure. I looked at this topic a few months ago.
The dollar is decidedly on the back foot ahead of the Fed, particularly against a resurgent euro which has made a new cycle high above 1.1870, its strongest in 4 years. Front-end yields are pushing lower with the 2yr Treasury at about a 3yr low of 3.5%
FOMC preview key points
- Federal Reserve is expected to cut rates by 25bps to a target range of 4.00% to 4.25%
- Although inflation has reaccelerated, the softening labour market has tilted risks to the downside
- Dissents are likely on both sides, with as many as three voters for 50bps of cuts, highlighting the differences within the FOMC and the tricky path Powell needs to take in the coming months
- Questions about Powell’s future and Fed independence remain and may weigh on the USD, especially if Fed goes dovish
- For stocks, front-running the cuts has pushed indices to record highs but could be a sell the news event for Wall St?
The key thing for the market is whether the Fed can cut now without compromising its nominal independence.
UK gets a lift, kind of
UK gets a lift, kind of
Trump visits Britain bearing gifts – hot on the heels of Alphabet announcing a £5bn investment in the UK, Nvidia, Microsoft and other tech giants are also piling billions into the country in AI investments. MSFT alone will plough an additional $30bn into the UK. Nvidia will put $15bn in with partners Nscale and CoreWeave. Meanwhile, GSK says it will invest $30bn in the US. It’s called trade, Trump style. Trump and Starmer are set to announce a new deal to collaborate on AI, quantum computing and nuclear technologies. It’s all going to require a tonne of energy. Good news for the government to hide behind but more worrying is the OBR revising UK productivity down, which squeezes the chancellor's headroom even further.
Meanwhile, data shows inflation is ticking along at 3.8% - staying at its highest in a year and a half. No great shakes but there are some signs of cooling in core and services inflation, the latter sliding to 4.7% from 5% ... nothing to move the needle on this week’s Bank of England meeting, however. It leaves November up for debate as well – the quarterly pace of cuts anticipated may just get stretched out a month to December. Anyway, for sterling it’s the dollar that is the key driver right now, though sticky inflation can help keep sterling bulls on the front foot.
The FTSE 100 was basically flat early doors with some gains for Centrica, Admiral, Entain and Babcock offset by the miners as precious metals took a bit of a bath. Fresnillo, Endeavour Mining, Anglo American and Rio Tinto were the main fallers among the blue chips on Wednesday morning. The DAX is firming up after a poor day Tuesday but momentum seems to be with bears as it appears to break down at the early August lows.
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