US Federal Reserve

Before The Bell 07/10/2019

By: Gary Palar


After a week coinciding with the Reserve Bank of Australia’s (RBA) decision to cut rates to another new record low of 75 basis points (bps), the same day Australian investors were taken aback as US markets processed the latest ISM Manufacturing PMI data overnight, which fell well below expectations and fuelled another bout of global recession fears.

Events Shaping the Week Ahead

US Markets

Fed Chair Powell is set to speak on early Australian Tuesday to Thursday morning of each day, ahead of the Federal Open Market Committee (FOMC) Minutes to be released to the public Thursday morning. The Minutes will cover the September 17-18 Fed Reserve Interest Rate decision which lowered the rate to 2 from 2.25%. With 8 of 10 officials wanting to decrease the rate at the time, and 2 dissenting to keep it steady, the tone and content of the minutes are hoped to provide more clarity to the direction of future monetary policy.

On the back of poorer PMI data, the markets were becoming seemingly optimistic of the chances of another rate cut before the end of the year. The same buoy for another round of cuts was one of the reasons to a reclaiming of lost ground mid-last week by the NASDAQ and DJIA. In further support, the CME FedWatchTool, as of 7/10, gave an 81.8% chance of the Fed decreasing the target rate to 150-175 bps at the next FOMC Meeting on October 30.

On Saturday, Powell affirmed he thought the economy was “in a good place” and echoed past statements “if interest rates are too low, the Fed… will have less room to cut rates to support the economy during downturns”. The mood of this ran consistent with past speeches leading to FOMC Meetings resulting in rate cuts. With CPI ex. Food & Energy data releasing the same Thursday, the groundwork for a potential end-of-October rate cut will be laid.

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Australian Markets

The previous week showed an Australian market correlated with decreased investor confidence in the global economy. Monday showed the worst of market concerns were alleviated from last week’s choppy US jobs data. However, without the same room for rate cuts as the Fed, the markets are expected to become more sensitive to economic news at home, especially with the effectiveness of further cuts being arguable with rates below 1%.

On Monday, the AiG Performance of Construction Index released modest numbers, however, the results did not give any clear insight into the housing price trend. Nevertheless, confidence in a revival of housing looks set to continue, to be compounded on Thursday, with Australian Home Loans for August (July’s was 5%) to be released by the ABS. Investors will be keen to see evidence of a sustained reversal off bottoming housing declines in early 2019. The Australian housing market had been experiencing a downturn for some time, with decreasing annual change in house prices since 2017.

The reasons faulted for the housing decline included:

  • broad changes to tax deductions from housing
  • further restrictions on foreign investment by state governments
  • increased construction of high-density multi-apartments

Since May 2019, increased investor confidence in policy direction and lower RBA rates seem to have stalled the trend, moving house prices into positive territory since July. The news on Thursday will be supported the day after by Investment Lending for Homes, also released by the ABS, giving a broader measure for home lending.

Thursday will also look at Consumer Inflation Expectations being released, containing insight into the probability of yet another rate decrease to 50 bps (as of 4/10, ASX RBA Rate Indicator gives it a 48% chance). The banks last week were, yet again, under fire by the Treasurer for not passing the latest rate cuts in full. The cuts re-introduce serious talks about the possibility of quantitative easing (QE) (the injection of cash into the economy through buyback of debt) by the RBA. This was a measure taken during the GFC, where the Bank of England (BoE) enacted QE measures when their cash rate reached 50 bps, and by the US Federal Reserve at 25 bps.

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European Markets

The BoE’s Governor Carney is scheduled to speak on Tuesday afternoon. Much of the movements in EU markets in recent years have had the results of the June 2016 UK EU referendum in the backdrop. A lot has happened hence I’ve linked a well summarised timeline of Brexit so far, here.

We’re now in the same month as the official Brexit date of October 31stand with each day passing, the deadline inches closer. The tough, public stance of the UK prime minister for a hard Brexit contrasts against the mounting knowledge of the restrictions for anything but. Carney’s speech in the same month as Brexit should hint some of the BoE’s response to a possible hard Brexit (though, becoming increasingly unlikely). In all the paths the UK could take to leave the EU, the tone of Carney so far has downplayed using the central bank’s primary tool, the interest rate in any case. The UK inflation rate had since decreased to 1.7% from 2.1% since Carney’s last speech, moving away from the BoE’s 2% target.

On the broader EU and shaping an important week for the direction of global monetary policy, the ECB Monetary Policy accounts will be publicised on Thursday. This will be ahead of the release of the Harmonized Index of Consumer Prices (HICP) – like the US CPI – on Friday.

Australian Currency

The AUD is set to start Tuesday at around 0.674 USD.

The AUD was at a 30-day low at 0.671 USD last Wednesday 2/10.

Upcoming Economic Events, with key events in Bold:

8/10 Tue: United States Producer Price Index

9/10 Wed: Japan Machinery Orders,FOMC Minutes

10/10 Thu: Australia Home Loans, United States Consumer Price Index ex Food & Energy, ECB Monetary Policy Meeting Accounts

11/10 Fri: Australia Investment Lending for Homes, Canada Unemployment Rate,EUR Harmonized Index of Consumer Prices


Sources:

ABC, AFR, Bloomberg, CNBC, Federal Reserve, FXStreet, Global Property Guide, RBA, Sydney Morning Herald, The Australian, The Wall Street Journal

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