The Weekly Update

The Fed “hawkishly” cut rates last week by 25bps, to 1.75%-2.0%, although a ¼% cut was largely priced in, it seems the market was left slightly disappointed, as looser monetary policy indications were also expected. As a result US Treasury yields drifted lower, with the benchmark 10-year down 18bps, at 1.72%. Meanwhile the DXY Index edged 0.26% higher. Also of interest was the Fed’s money market cash injections through the week, the first in a decade, as short-term rates spiked as high as 10% as a result of tighter liquidity. Such repo operations were commonplace ahead of the financial crisis but since stopped once the Fed widened its balance sheet and target rate bands; used to manage liquidity. With few signs from the Fed of the revival of QE, the Fed may look to conduct more frequent repo operations, some reports claim this could continue until October,10; the long-term effectiveness of this operation, however, is yet to be decided.

Staying with central banks, the BoJ’s Kuroda stated that the central bank would look to review its economic and inflationary outlook at the meeting next month, adding that “we are more eager to act given heightening global risks”, when asked about further policy easing. On Friday, however, the BoJ announced that next week it will slightly reduce the amount of government debt it purchases through its QE program. The country’s national CPI (ex fresh food) reading rose 0.5% in August, in-line with expectations, however, rising at the slowest pace since July 2017.

The BoE also stayed pat at 0.75%, but warned that the uncertain political landscape could continue to hold inflation below target; August CPI data missed expectations, with the headline print at 1.7% in August, down from 2.1% previously. The central bank expects the economy to expand by only 0.2% (revised from 0.3%) into the final quarter of the year; the good news is that the economy could therefore avoid a technical recession.

The OECD published its economic forecasts last week, it highlighted its concerns over a no-deal Brexit and the consequent effects on the economy, estimating a 3% fall in UK economic growth over the next three years. In terms of its global outlook, the OECD report continued to point to the negative impact of heightened political uncertainty and protectionist trade policy on economic growth. Its latest projection is for global growth at 2.9% in 2019 and 3% in 2020, down from 3.2% and 3.4% in May; this is the weakest level of growth since the financial crisis. Moreover, OECD analysts see “downside risks continuing to mount” and describe the outlook at “fragile and uncertain”.

Meanwhile, oil witnessed a rollercoaster week following the Saudi attacks, having traded as high as $71.95 Brent closed the week 6.74% higher at $64.28. According to reports the Abqaiq processing plant was hit 18 times, in the drone and missile attack last week, with some towers in need of replacement. Saudi Aramco on Friday said full production capacity is expected at the world's largest petroleum plant by the end of the month; although other reports suggest it may take longer. Tensions between the US and Iran grew over the weekend with the UK also claiming it will support any potential US-military action against Iran; we will continue to monitor the situation closely.

A quiet day on the data front today will see a gathering at the UK supreme court, where Boris Johnson’s parliamentary suspension will be called to question and Brexit discussions will ensue as the 31st October draws nearer. There are also a number of Fed members speaking, including Fed Chair Yellen, and St. Louis Fed President James Bullard who will no doubt be asked to comment further on his statement made last Friday: “A 50 basis point cut at this time would help promote a more rapid return of inflation and inflation expectations to target”. Not much to watch on Tuesday aside from the UN General Assembly debate. On Wednesday, US new home sales may be of interest and Thursday will see the release of the ECB’s monthly Economic Bulletin and US data including GDP prints. A bit more excitement on Friday with US PCE releases, this favoured inflation reading is expected to come in at 1.8% in August. Personal spending, durable goods orders and sentiment readings may grab some market attention too. Following the positive trade chatter out of Japan over the week, ongoing US-China trade talks could be watched closely as they met for the first time in close to two months last week. We heard that Chinese officials cancelled a trip to the US’ farm states (apparently nothing to do with trade though). The US has warned that a trade deal must be made before the US elections next year. The repatriation of UK citizens, said to be on a scale comparable to Dunkirk, will also been keenly watched by many following the fall of Thomas Cook and subsequent government CAA deployment.

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