Post-Fed Fallout Continues As Blockbuster Week Concludes

WHERE WE STAND – Fallout from Wednesday’s FOMC decision continued, by and large, to drive markets yesterday, as participants digested Powell & Co’s policy messaging.

The equation on that front, to me, remains a pretty simple one. Clearly, via the policy statement, and the updated ‘dot plot’, the Committee have rather explicitly outlined their plan to front-load rate cuts, in turn tilting the reaction function almost entirely towards labour market developments. Hence, policymakers are aggressively leaning in to support employment, and economic growth more broadly.

You, therefore, have an equity bull case that was already built on the idea of strong economic growth (which may now get stronger), and solid earnings growth (which may also now become more solid). On top of that, the policy backdrop is set to get considerably looser, considerably quicker, than had been expected. Combined, that’s about as perfect a mix as one could really wish for when it comes to propelling risk assets higher – no surprise, then, that stocks on Wall Street gained ground yesterday, nor should it be surprising that the ‘path of least’ resistance continues to lead higher.

That’s not to say there are no risks at all. The most obvious of these would be a scenario where the first two legs of the aforementioned bull case begin to wobble, at which stage we’d probably move from the current base case of a ‘soft landing’/policy-induced economic turnaround, to needing to price a much higher degree of recession risk. To be clear, though, we’re not there yet, nor do I expect us to get there any time soon.

Switching gears, here in the UK, the Bank of England’s Monetary Policy Committee stood pat yesterday, holding Bank Rate steady at 4.00%, in a 7-2 vote, as expected. Along with that, though, the MPC took the pragmatic decision to not only reduce the QT envelope in the twelve months ahead to £70bln, down from £100bln, but also to conduct just 20% of the £21bln in active sales at the long-end of the curve. This should help to alleviate some pressure seen recently on long-end Gilts, though is little more than a sticking plaster which buys the Treasury some time to get the UK’s fiscal affairs in order. In fact, the mere need for the Bank to trim sales like this speaks volumes in and of itself about the broader state of affairs here in the UK.

Besides that, we also had a hawkish 25bp cut from the Norges Bank, who indicated that just one 25bp cut per year is likely over the next three years while, overnight, the Bank of Japan kept rates unchanged as expected, though also announced the start of ETF and J-REIT sales.

Elsewhere, it was a bit of a ‘day of two halves’ for markets yesterday, as initial dovish cross-asset trade in the aftermath of yesterday’s FOMC decision turned into quite the opposite once US participants entered the fray. Quite why that proved to be the case is anyone’s guess, really, as Treasuries sold-off across the curve, and as the dollar rebounded against all major peers, in turn also posing a headwind to gold.

Even while I scratch my head to find a narrative for all that, it at least worked in favour of my Treasury steepener view, which has been rather battered & bruised of late. That’s a bias I’m happy to hold onto, though I must admit I’m becoming a bit more nervous about my bearish USD view. Although the longer-run path probably still leads lower, the market seems relatively content to ignore the erosion of Fed policy independence for the time being. Plus, with the buck down about 10% on the year already, it’s pretty easy to see that we’ve come a very long way, in a very short space of time. I’m not going to ‘throw in the towel’ on this call just yet, but if we see the DXY make its way back above the 50-day MA at 98.10, it might be time to, at least for now.

LOOK AHEAD – A long and busy week is, mercifully, almost at an end.

There’s not especially much of interest on today’s docket, mind, with only the latest UK & Canadian retail sales reports, along with last month’s UK government borrowing stats, scheduled. The latter, unsurprisingly, will likely point to a further deterioration in the UK’s fiscal position, further raising the (already v high!) likelihood of significant tax hikes at the Budget on 26th November.

Meanwhile, the Fed’s ‘blackout’ period is now at an end, meaning we’ll receive not only remarks from 2027 voter Daly this evening, but should also at some stage get a statement from Gov. Miran explaining his dissent.

I’ll probably be at the desk for the latter, but certainly don’t plan to hang around for Daly’s fireside chat. There’s a beer or three with my name on them somewhere, and they won’t drink themselves.