Fed Chairman predicts a brighter economic outlook

Federal Reserve Chairman Jerome Powell confirmed in his press conference following yesterday’s FOMC meeting what the market had been expecting in recent weeks.

The decision to cut short-term interest rates by 25 basis points was not unanimous and the conditions precedent for any further increase have been raised.

Powell was cautiously optimistic about the prospects for the economy almost giving the impression that he and his colleagues were giving the market what it wanted at this meeting.

One person who didn’t get what he wanted, was President Trump. Following the announcement, he tweeted “Jay Powell and the Fed fail again”. He went to on to say the FOMC has “no guts, no vision and no sense”, calling Powell “a terrible communicator”.

In what has become his trademark ambiguity, Powell commented that his colleagues were split about the current and future prospects for the economy with most believing that a rebound in activity is the most likely scenario although they stand ready to act should the economy “turn south”.

Inflation is “controlled”, despite its recent rise, remaining around the Fed’s 2% target any further increase will limit the Fed’s desire to cut rates again.

Following the meeting, the dollar rallied as traders expressed a belief that it is unlikely that rates will be cut again unless there is a significant deterioration in the economy. Chairman Powell and the rest of the more hawkish members of the FOMC will need more than anecdotal evidence to move again in the short/medium term.
The index reached a high of 98.69, closing at 98.58.

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BoE to remain sidelined

In contrast to the media circus that surrounds FOMC meetings, today’s Bank of England Monetary Policy Committee meeting will be a “low-key” affair.

There is zero prospect of short-term rates being cut as Brexit is currently the only driver of the economy and while uncertainty continues and inflation remains controlled, as evidenced by the August data released yesterday, the Central Bank remains sidelined.

Last month headline inflation fell to 1.7% year on year from 2.1% in July and a market expectation of a more moderate fall to 1.9%. The rally oil prices following the recent attacks in Saudi Arabia may push it higher this month and this is likely to be mentioned by Governor Carney in his post-meeting press conference.

Prime Minister Boris Johnson continues his bullish outlook for a deal being reached on Brexit at the EU summit next month. The pressure to reveal his plans to deal with the remaining issues was ramped up a little yesterday as the Finnish Prime Minister following a meeting with French President Emmanuel Macron confirmed that both had agreed that written proposals need to be received by the end of this month or “it is all over”.

Michel Barnier the Chief EU Negotiator, who has been ignored to a certain extent by Johnson, also commented that time is running out. He strongly defended the backstop mechanism that is “being put in place to protect the integrity of the single market” and went on to say that it is no use telling Brussels why the backstop should be removed without putting forward alternative proposals.

There has been little mention so far from any EU officials about the prospect of an extension to the October 31st deadline as they seemingly believe Johnson’s promise that he won’t ask for one.

Yesterday, the pound reacted to the stronger dollar, falling versus the greenback to a low of 1.2438, before recovering a little to 1.2478. It continues to recover versus the euro, making further ground yesterday reaching a high of 1.1340 and closing at 1.1307.

German sentiment improves despite weak current view

Data released this week by the influential German ZEW institute provided a more graphic image of what the market has been considering recently. That is that although the current situation remains weak, the prospects are beginning to improve as the economy is beginning to show signs of “bottoming out.

There should be no celebration in Frankfurt at the offices of the ECB just yet, and their actions in cutting rates and restarting QE are still to be fully appreciated. However, there is a possibility that a highly damaging recession through the coming winter can be avoided.

Earlier in the year, ECB President Mario Draghi was strident in his view that inflation would start to rise in the summer, driven by higher wages. Wages have remained static and headline CPI has remained unchanged at 1% for the past three months.

Brexit is taking up an inordinate amount of time and effort in Brussels. Next month’s EU Summit was supposed to discuss the next round of budget proposals and consider how to stimulate greater economic activity. However, it will now consider London’s proposals for changes to the Withdrawal Agreement they believed had been finalized almost a year ago.

Boris Johnson, by sheer force of personality, won’t allow EU leaders and negotiators to simply say “the time for negotiation is at an end” and will try to squeeze every last ounce of effort into finding a solution that means he can stymy Parliament’s demand that he request an extension to the deadline.

Yesterday, the single currency followed the same trajectory as the pound reacting to a stronger dollar. It fell to a low of 1.1013, closing at 1.1030.