FOMC & BoE Cut Rates, Both Sticking To The Script

WHERE WE STAND – Remember back in the first Trump Presidency, when folk were buying baseball caps for every round number milestone that the Dow hit?

Well, I suppose it’s time that we all went and bought a new hat, engraved with ‘Spoos 6,000’ – as that was the milestone that was breached yesterday, with the front S&P 500 future trading north of that figure for the first time ever.

I can’t say that there was a particular catalyst for the move, which seemed more to be a continuation of the initial post-election equity gains than anything else, with the Nasdaq and Dow also notching fresh records as the day went on. My long-standing equity bull case remains intact, with strong earnings and economic growth, coupled with the forceful ‘Fed put’, set to continue to propel the market higher over the medium-term. Added to this, cleaner positioning after participants hedged their books pre-election, and expectations of Trump’s anticipated tax cuts and fiscal stimulus, is helping to further juice the upside in risk.

Speaking of the FOMC, we heard from Powell & Co yesterday, with the FOMC – as expected, and fully discounted – delivering a 25bp cut at the conclusion of the November meeting, accompanied by a policy statement that was broadly unchanged from that delivered last time out.

Naturally, Powell refused to be drawn on any political questions, instead sticking resolutely to a now-familiar script, noting that policy is on a journey back to neutral, with the speed of said journey to be determined by incoming economic data, on a meeting-by-meeting basis.

Hence, my base case remains that the Committee will continue to deliver 25bp cuts at every meeting, until a neutral rate, around 3%, is reached next summer. Risks, though, to this path have now become more two-sided since the election.

Were the labour market to weaken unexpectedly, and unemployment rise north of the SEP median 4.4% expectation for this year, and next, the prospect of a larger 50bp cut would come back onto the table. On the other hand, President Trump’s likely reflationary agenda represents a hawkish risk, particularly if the imposition of tariffs reignites inflationary pressures.

It is, obviously, too early to say how significant this latter risk could prove, though in early-2025, the FOMC will likely need to take policy off its current ‘autopilot’ setting, and become considerably more nimble.

We also heard, yesterday, from the Bank of England, who delivered a 25bp cut of their own. The MPC voted 8-1 in favour of such action, with only uber-hawkish external member Mann favouring holding rates steady. The MPC’s statement was also largely a ‘carbon copy’ of the last, repeating that policy will need to remain “restrictive for sufficiently long” in order to bear down on persistent price pressures within the economy.

The Bank’s latest forecasts, meanwhile, reflecting last week’s expansionary Budget, as well as a more dovish market-implied rate path at the time of forecast collation, the profile was revised notably higher, to the tune of around 0.5pp at its peak. Consequently, headline CPI is now seen at 2.2% in the final quarter of 2026, before falling to 1.8% in 2027.

With this forecast conditioned on the market-based rate path, the BoE are implicitly signalling to financial markets that too great a degree of policy easing is presently priced in.

The base case, then, remains that the ‘Old Lady’ should continue to plot a relatively cautions course, at least for the time being, with Thursday’s move being the final cut of the year, with the next now unlikely until February 2025, in conjunction with updated forecasts. If, at that stage, policymakers have greater confidence in the disinflationary path being well-embedded, the pace of normalisation could well quicken through the early part of 2025. Quarterly cuts, though, remain the base case for now.

Away from the policy bonanza, yesterday saw a fairly sizeable unwind of the so-called ‘Trump Trade’, at least in the FX and rates spaces. The dollar gave up around half of Wednesday’s gains, with the DXY retreating back under the 105 figure, amid broad-based weakness which saw all other G10s gain ground, as cable reclaimed (briefly) the 1.30 handle, the EUR rose back above 1.08, and USD/JPY slipped under the 153 mark.

Despite Thursday’s losses, I remain bullish on the buck, with the ongoing ‘US exceptionalism’ theme not likely to disappear any time soon, meaning that any dollar dips should be seen as buying opportunities, in my view.

Dollar downside was led by a notable rally across the Treasury curve, led by the belly of the curve, which also appeared something of an unwind of aforementioned ‘Trump Trade’ positions. Perhaps, as I postulated yesterday, participants have sought to lock in yield at these elevated levels, as the Fed continue on their path back to neutral. Who could blame them for such a logical choice, if so!

LOOK AHEAD – After such a busy, and at times chaotic, week, I’m very glad to say that there is nothing of any real interest on today’s economic data docket.

This afternoon’s Canadian labour market report is unlikely to move the needle especially much for markets at large while, by the time the preliminary read on November’s UMich consumer sentiment gauge drops, most participants, at least in Europe, will likely have left for the weekend, such has been the gruelling nature of the last few days. A subdued day, then, is perhaps in store, to close out what’s been an event risk bonanza over the past fortnight.