Fed Expected to Announce Interest Rate Cut Today But Forward Guidance Uncertain

September 18, 2019

Investors will be focused not on what actions the Fed implements today but rather on what is said about future monetary policy where FOMC voting members appear divided. Macroeconomic forecasts will be updated, and Chairman Powell will hold a press conference afterward.

The dollar has been decently bid today, with gains overnight amounting to 0.4% against the Australian and New Zealand currencies as well as the British pound, 0.3% relative to the euro and Swiss franc, 0.2% versus the loonie, and 0.1% vis-a-vis the yen.

Ten-year sovereign debt yields in anticipation of a Fed easing today have dropped 4 basis points in the U.K., France, Spain and Portugal and 3 basis points in the U.S., Germany, Japan, and Italy.

Share prices closed down 1.1% in New Zealand, 0.5% in Singapore, 0.2% in Japan and 0.1% in Hong Kong but rose 0.6% in Indonesia, 0.4% in South Korea and 0.3% in China and Taiwan. Equities are marginally higher in France, Germany and Great Britain.

The prices of WTI crude oil and Comex gold are down 0.8% and 0.3%.

Israel’s do-over election produced an inconclusive result, putting Netanyahu at risk of losing power.

New Zealand recorded a NZD 1.1106 billion current account deficit last quarter and accrued a deficit of NZD 10.233 billion over the last four reported quarters, equivalent to 3.4% of GDP.

Japan’s customs trade balance remained in deficit last month, printing at JPY 131 billion on a seasonally adjusted basis (a 3-month high) and at JPY 136 billion in unadjusted terms. Exports fell 2.8% on month and 8.2% on year. There has been a seasonally adjusted deficit every month since July 2018.

Construction output in the euro area fell 0.7% in July, reversing June’s increase of 0.6%. That was the fourth drop in five months and resulted in a lower 12-month 1.1% rate of increase.

Euroland’s 1.0% year-on-year rate of consumer price inflation in August estimated initially was confirmed by today’s second estimate. The CPI went up 0.1% on month, and year-on-year inflation matched July’s result but was down from 2.1% in August 2018. In Germany, whose officials have opposed ECB quantitative easing, inflation of 1.0% was actually 0.2 percentage points higher than in August 2018. Between then and now, in contrast, on-year inflation has dropped by 1.3 percentage points (ppts) in France, 1.1 ppts in Italy, 1.8 ppts in Spain, 1.7 ppts in Belgium, and 0.9 ppts in Austria. Core CPI inflation for the whole common currency area was 0.9% in both July and August.

British CPI inflation decelerated more than forecast to 1.7% in August from 2.1% in July. Core CPI dropped to 1.5% from 1.9%. Producer output price inflation slipped to 1.6% from 1.9%, and producer input price inflation turned negative with a reading of -0.8% after July’s +0.9%. Finally, the British statistical office’s house price index showed only a 0.7% year-on-year rise in July, smallest since September 2012. Separately, new car sales in the U.K. were 1.6% fewer in July than a year earlier.

Industrial orders in Italy dropped 2.9% on month and 1.0% on year in July. The 12-month change has been negative every month this year. Industrial sales in Euroland’s third largest economy also recorded month-on-month and year-on-year declines in July. On a brighter note, Italy’s EUR 7.63 billion trade surplus in July was 35% wider than a year earlier, and the year-to-July surplus of EUR 29.7 billion was EUR 5 billion greater than in the first seven months of 2018.

CPI inflation in Cyprus  and Austria was respectively at negative 0.7% and positive 1.5% in August. Portuguese PPI inflation in August of minus 1.1% was its most negative in 3 years.

South African retail sales ticked 0.2% higher on month in July but experienced a smaller year-on-year increase of 2.0%. South African CPI inflation rose from a 7-month low of 4.0% in July to a 2-month high of 4.3% in August.

Westpac’s index of Australian leading economic indicators fell 0.3% in August, the third decline in four months.

U.S. housing starts data due shortly will be overshadowed by the FOMC announcement later in the day. Monetary policymakers are also meeting in Brazil. Canada reports its monthly CPI figures today.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

 

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