With the Fed announcing a substantial 0.50% interest rate cut and signaling potential further easing, how did financial markets respond?
Did major asset classes react uniformly, or did other headlines overshadow the impact?
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Headlines:
- New Zealand’s current account deficit widened in Q2 to 4.83B NZD, up from the revised 3.83B NZD shortfall, exceeding the expected 3.95B NZD deficit.
- Bank of Canada (BOC) official Rogers stated that core inflation measures should decrease and emphasized the need for further progress.
- Japanese core machinery orders fell by 0.1% month-over-month in July, missing the 0.4% expected decline and down from a previous 2.1% rise.
- Japan’s trade deficit narrowed from 0.68T JPY to 0.60T JPY, better than the 0.96T JPY forecast, with a weaker yen inflating import values and a 5.6% increase in exports.
- Australia’s Melbourne Institute leading index decreased by 0.1% in August, following a flat reading previously.
- API reported a rise in private oil inventories by 1.96M barrels, against an expected decrease of 0.1M barrels.
- UK August CPI met expectations with headline inflation at 2.2% y/y and core CPI at 3.6% y/y; services inflation increased from 5.2% to 5.6%.
- Eurozone’s final CPI figures remained unchanged at 2.2% for headline inflation and 2.8% for core inflation year-on-year in August.
- EIA reported a 1.6M barrel decrease in crude oil inventories, surpassing the -0.2M forecast and reversing a previous increase of 0.8M barrels.
- US building permits increased from 1.41M to 1.48M, and housing starts rose from 1.24M to 1.36M in August.
- BOC’s Summary of Deliberations highlighted weaker household spending, reduced residential investment, and rising unemployment.
- The FOMC cut interest rates by 0.50% in a 11-1 vote, with dot plot forecasts indicating an additional 0.50% cut for 2024.
- The Fed revised its headline and core inflation estimates lower for this year while raising the jobless rate forecast to 4.4% from 4%.
- In the press conference, Fed Chair Jerome Powell reaffirmed the Fed’s commitment to price stability but also addressed risks to the labor market.
Market Price Action:
Financial markets displayed notable volatility on FOMC day, with no "calm before the storm" in earlier trading sessions.
Crude oil started weak, erasing most of its previous gains and falling back to near-term support around $68.65 per barrel following a surprise build of 1.96M barrels in API private oil inventories. However, oil prices rebounded when U.S. markets opened, receiving an additional boost from a larger-than-expected 1.6M barrel reduction in EIA crude oil inventories.
Treasury yields edged higher during the London session, as investors likely reduced their bond holdings. Yields then dropped sharply following the Fed’s decision to cut U.S. borrowing costs by 0.50%.
Gold prices surged briefly after the Fed’s announcement but quickly retraced gains when Fed Chair Powell tempered expectations of further aggressive easing in the near term.
U.S. equity indices advanced cautiously before the FOMC announcement. The larger-than-expected rate cut initially triggered a brief risk rally, but indices soon gave up their post-FOMC gains, closing only slightly higher for the day.
FX Market Behavior: U.S. Dollar vs. Major Currencies
The U.S. dollar began the day on a negative note against its major counterparts, notably weaker against the yen, which received a boost from better-than-expected Japanese trade data. Japan’s trade deficit narrowed despite a depreciating yen inflating import values, thanks to a strong 5.6% increase in exports, marking the ninth consecutive monthly gain.
The Kiwi also had a strong start, despite a weaker-than-expected current account balance. It strengthened against the dollar during the London session but retreated once U.S. markets opened.
Leading up to the FOMC decision, major currencies traded within wider-than-usual ranges. The announcement of a significant 0.50% rate cut by the Fed, the largest since the 2008 financial crisis, triggered a sharp selloff of the U.S. dollar across the board. The dot plot forecasts indicated more rate cuts for the remainder of 2024, adding to the dollar's decline.
However, the U.S. dollar soon recovered and rebounded to pre-FOMC levels and beyond after Fed Chair Powell's press conference. Powell downplayed expectations of additional large rate cuts and reassured that the economy remains strong. Despite this rebound, the Greenback ended the session slightly lower against most of its peers, except for the Canadian dollar.
Upcoming Potential Catalysts on the Economic Calendar
- Australia’s employment report at 1:30 am GMT
- Swiss trade balance at 6:00 am GMT
- Swiss SECO economic forecasts at 7:00 am GMT
- BOE monetary policy decision at 9:00 am GMT
- U.S. initial jobless claims at 12:30 pm GMT
- U.S. Philly Fed index at 12:30 pm GMT
- U.S. existing home sales at 2:00 pm GMT
- U.K. GfK consumer confidence at 11:00 pm GMT
- Tokyo core CPI at 11:50 pm GMT
With the September FOMC decision behind us, are markets poised for a quiet day? Not quite! Today’s economic calendar is packed with significant events. It kicks off with Australia’s August jobs report during the Asian session and continues with the BOE’s monetary policy decision in London. Later, we’ll see U.S. initial jobless claims and the Philly Fed index, both of which are likely to drive intraday USD volatility.
