FED Cuts Rates as Hawkish Cut Turns Dovish

Hi guys, good morning. Hope everyone is doing well. Thursday the 31st of October, otherwise known as Halloween, the fake Brexit day, which of course has now been pushed down to the 31st of January, and the last day in office for Mario Draghi and actually John Bercow as well. And so an emotional day across the markets, but looks to be a good one, certainly on the calendar. Another jam-packed day. We'll have a quick look over the, the charts from yesterday, the, the headlines that brought us to where we are, uh, so we're best prepared going forward. Just having a quick look at those charts and, and bringing, uh, here on the left-hand side you've got the EUR/USD, middle top gold, bottom T-notes and S&P on the right-hand side. You can see overall The markets have taken the, the Fed cut as expected, uh, of a 25 basis point. They've taken it as an overall dovish reaction, initially hawkish as euro-dollar came under some pressure, as did gold, S&P, and T-notes, only to reverse into the back end of the session. And the S&P printing a new all-time high, uh, late last night, uh, hitting 3055. We'll come on to the importance of that area shortly. As we know, that is near where the trend channel comes in. So overall, um, you can see a dovish reaction in markets today. Whether that's going to be long-lasting or not, I think, is going to be up for debate. There's a long time to the next meeting, I think 41 days off the top of my head, um, until December meeting. So a fair bit of data to come between now and then, and for the Fed to make their decision, and what will be priced in will be priced in. Also yesterday, I'm just going to bring S&P into the full screen now, a couple of comments around the Chile summit and spiked the S&P lower. I'll just bring this in. Unfortunately, not much can be done about this. The, the algo is taking it as the fact that Trump and Xi would not be meeting and signing the first part of that deal, negative stocks, only to realize it was cancelled because of civil unrest within Chile. And actually, it's the, the first cancellation of 31 years. But of course, this is where Trump had hoped to sign a deal. There's been no clarification where else they are going to, but there's no real negative fallout from this. And the algos effectively got it wrong, and we went back to exactly where we were within the 5 minutes. Also yesterday, data-wise, we had oil numbers out earlier than expected— earlier than usual, I should say— of the 2:30 release. Just highlighting that there, let's put a little circle where it came out. A bigger than expected draw of 5.7 million, forecast of only just over— just over half. And, and we came under significant pressure, uh, getting us down to the low that we had from yesterday and beyond, only to find support support around 54.50 and push higher in, in late trade, mainly thanks to the weaker US dollar as well. Also, a couple of points to make note before we get into the Fed and the Brexit update was a rumor reported by the Financial Times on Twitter anyway that Nigel Farage would be stepping down. However, if this is not true, that, uh then definitely remains a problem. But on the idea, uh, and comment that he did, the pound did push higher, spiking higher. Uh, you can see here, let's go back to last night, really starting from around sort of 6.50 and beyond. This also was the time that the US dollar started to weaken again though, so a bit exaggerated on that. And there's been no confirmation, concrete confirmation that Najafaraj in the Brexit Party will be stepping down, which of course in theory would, uh, help Conservatives take more of a majority, uh, and less focus, uh, elsewhere on that. So just going over to, uh, the headlines, um, and a tweet from— and this was going back to, uh, to Tuesday, just on the calls of the general election. So Nigel Farage tweeting, at last deadlock in Parliament is broken. Brexit now has a chance to succeed. Um, while that may be true, I think that's only true if Conservatives get a majority. So we, we said this yesterday in the briefing, that perhaps the biggest hurdle for a deal coming to play is this man and the Brexit party. So this rumor would have been met, if true, with definitely pound positive on the idea that he's not going to be looking to take some seats away from the Conservatives. A couple of comments overnight in the— let's bring this in— the Daily Mail, of course. So ignore the, the Only Way Is Essex headlines on the right-hand side. I'm sure you're not that interested in those. But Nigel Farage saying his Brexit Party will target Labour Leave seats rather than Tory ones to clear out the Remain Parliament. Amid Conservative fears that strategy could still deny Boris Johnson a majority. On paper, that would, uh, would be fine, but there's certainly some analysts and research houses that are saying they're concerned on the pound at the moment, some even saying they're short, just due to the fact that Nigel Farage could be the fawn in this push to gather a a bigger majority. So Nigel Farage was saying this and speaking actually to the Financial Times yesterday. So that rumor probably was fake, and it would still be one I'd be looking out for. But here are some of those seats. You might not be able to see this. Here we go, let's just zoom in. The top 10 marginal seats where the Brexit Party could split the Tory vote and therefore hand victory to Labour or Lib Dem. So this is On the flip side of perhaps Nigel Farage's plan, if he was to go down the route and targeting these 10, taking away from Tories the votes, and obviously Labour or Lib Dems could come away with a bit more of a vote. And of course, the— we'll go over a couple of pound scenarios, but anything other than a Conservative majority is going to be, I'd say, Well, I guess if the Lib Dems were to hold a massive surprise, then you'd see pound positive. But basically, if the Conservatives don't get a majority, I do think we'll come under a bit of pressure for the pound. And, and that's kind of what we're saying here in the Bloomberg article as well. The headline says it all: Pound investors' biggest fear on snap UK election isn't Corbyn, and it's all about Nigel Farage. But let's just have a quick look through some of the, the worst and best case scenarios for, for the pound. And just before we do so, bring in the, uh, the pound chart. And I was— and we— what we up to now? And almost 130. And I was saying yesterday, I think we over— by the time we get to December the 12th, I think we get a conservative majority, and I think we come up to, uh, 135, just the resistance from the beginning, uh, of March. And of course September last year. Big level, big hurdle to get through the 130, but I do feel, uh, we can continue to push up, uh, albeit helped by maybe a bit of a weaker dollar, uh, as well. Let's have a quick look over these scenarios. The worst case Brexit party coalition. So the biggest issue over the last 6 months for, for the pound when we started coming down was the idea that no deal has a higher chance of happening. We saw us reach 120 Yes, we reversed since then, but that's no deal being taken off the table. If Brexit Party come in and with the coalition, they're going to be pushing for that. So to keep it simple, that is going to be bad for the pound and therefore increases the chance of no deal. While I still think no deal is, you know, your 1%, 2%, it has to be priced into the markets if they were to get in. I still think that would be a buy the dip situation later on, but that's just going to be Gonna be a nightmare if that was, uh, to happen for, for the pound, um, and obviously Conservatives and Boris Johnson as well. Best case, Johnson wins Brexit deal. So, and this is very much what the markets, you would say, it's just expecting. I wouldn't say it's fully priced in because there's of course the uncertainty of a general election, but this would be the best case, Johnson to win a majority. And the analysts here saying 'Our central view is we probably assume that Johnson does manage to cobble together a government and he gets the deal through,' who expects the currency could rally more than 2% to 132. So it was sort of midway between my target and where that would go. So we'll, we'll see over time how that comes through as well. I guess best, best case scenario, and this is unlikely of course, would be no Brexit, no deal not no deal, no Brexit, and the pound would rally quite nicely. And I would say this is more a Lib Dem win rather than Labour. And this is what they're saying as well: a surprise Labour win could see the pound fall in the short term, but in coalition we would expect Labour to be more moderate than maybe feared, like we saw with Syriza in Greece. So yeah, I I bet the best case is no Brexit and no hard left economic agenda. So I think if Labour were to pick up in the polls, you'd see pound come under a bit of pressure. But it would again, I think, if they were to get into a majority or a coalition with Lib Dems, then you would see pound push higher eventually. I do feel that would be the case. So one to keep an eye out on, on the whole Nigel Farage Brexit Party. Obviously over the coming weeks there's going to be plenty of poll updates and so on. There was this one I saw earlier, probably not on my Twitter anymore, uh, let me see if I can get it up, and it was a poll done, if there was a referendum tomorrow, what would it be? And leave 46%, remain 54%, uh, from Servation. But of course, you know, read what you want into polls at your peril, especially after the, well, the last election, the last Trump election, and of course the referendum as well. Moving on to the Fed from last night, cutting a quarter point, so as expected. To keep it short and sweet, they now believe rates and policy is about right, so they paused. They're saying they're going to pause and they would have to see a material miss, uh, in data and everything else to start cutting again. Uh, they would only hike to fend off high inflation, which they see expectations, uh, currently on the low side. So we cut rates for the third time, July, September, those previous. We're now looking to hold rates unless data worsens, and we would only hike if inflation improves. Improves a lot more than we were expecting. In summary, uh, going forward, as with July and September, uh, George and Rosengren dissented, preferring to keep rates on hold. Probably again worth over the coming weeks just keeping an ear out for, for them. Are they now going to turn ultra hawkish and actually say next year we could even get a rate cut at some point? Markets were pricing yesterday before the announcement another cut last, uh, well, in, in the middle of next year, uh, traders have unwound those bets, uh, certainly for a December meeting, uh, and next year as well, as, as the Fed's saying they are, they are on hold. But with that big gap, with 41 days until the next meeting, the data is going to play a big part. Um, you also had the economic forecasts, uh, in that December meeting, which we didn't have yesterday along with the rate projections, making it unclear yesterday just how many non-voters on the committee had also penciled in a reduction. So December is going to be a key one, uh, probably one of the last real key events, uh, of, uh, of the year along with— let me see here. So yeah, it is 41 days. Next day, 11th of December. And then of course on the Thursday you're going to have the general election. So they're probably up right up there, the 11th and 12th, as a really key, uh, time for markets in, in general. Some comments from Powell, um, the— well, he said there— well, in the statement, before we go on to those, those comments, they altered their language. And this was the rumored thing that they were going to do, and it came to fruition, um, that they're dropping the pledge to act as appropriate to sustain the expansion. And then they added a promise to monitor, monitor data as it assesses the appropriate path of the target range for the federal fund rates. Powell went on to say, uh, he believes monetary policy is in a good place, um, and we see the current stance of policy is likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook. And then, so if we go back to the charts. Let me just bring in, uh, I want to start off with the euro. I guess it's not a bad one to have a look at here. And I'm just going to bring on the pivots to give us a bit of time, make it clearer. So you can see, and now I'm going to put this on to the 5-minute. At this moment, we were still really pushing down, and it wasn't until he started talking— unbelievably, the market here is basically saying, what, we're not gonna we're not going to raise rates now, and the dollar weakened. So these comments, uh, from, from, from Powell saying we would need to see a really significant move up in inflation that's persistent before we could— we'd consider raising rates to address inflation concerns. So this unwind of the, the hawkish cut that was perhaps expected on the idea that they're not looking to raise rates anytime soon unless inflation markedly improves, which is not expected to do. And then euro pushed higher, the low coming in on that day on the futures around 1.1113, uh, and we just moved up, uh, sort of 70 pips or so from then. And we confirmed a push this morning as well. And the S&P, you can see, pushing higher overnight, uh, although just drifting lower a touch from that all-time high. Gold, uh, saved really as well because those levels where it was trading down at, really key. If we can get a close below there, uh, and then we are really looking down to the 11th and below. So gold help, but we are just hitting some key resistance, uh, traded from the low of the 25th. So key level traded in gold, and now above the 1500, uh, handle. Back to, uh, the headlines. So we were basically to finish up in, in that summary Um, the— it was a hawkish cut turned dovish on the high bar to raising rates because of inflation remaining muted. Other comments, uh, just to go through, a couple of Bloomberg economists. The October FOMC post-meeting, uh, communique proffered the possibility of additional policy, policy easing but dialed back the degree of certainty through subtle language changes. This is consistent with the Bloomberg Economics expectation that officials would aim to preserve optionality around upcoming meetings, even though we expect tepid economic data to ultimately compel the Fed to act. So we're broadly speaking right now, we're quite well balanced. If the data is going to be poor over the next couple of weeks and a month, I guess, uh, then a month and beyond, then the Fed will obviously have to look to start changing. But on the flip side if the data was really strong, inflation picks up, well, hang on, we could now be looking to raise rates at some point next year as well. Also, uh, well, yeah, here we can just go before we move on to have a couple of comments. This is the, the CME pricing in of the next rate decision. So only 17% expected for, uh, ease, no change expected at 83%. January meeting You can see relatively, uh, similar, uh, I guess, but a slight increased chance of, of an ease by then. Comments overnight, not a massive mover, but the Aussie has been pushing higher as with a majority of these dollar pairs. An RBA board member worrying about the Fed easing and easing and how that will just strengthen the Aussie dollar, and they're speaking on behalf of the RBA saying they, you know, are happy with how things are going, but we don't want, uh, a higher exchange rate. And obviously if the US were to keep cutting rates, weakening the US dollar, well, the other currencies are going to strengthen, and the Aussie just not wanting this. So just be aware, perhaps at the back of your minds, if any further comments from RBA members about monetary policy in a bid to almost go into a currency war with the US and look to, to devalue theirs. Let's have a quick look over at the Aussie dollar, just over maybe 240, going back to October. It looks very similar, doesn't it, to the euro and the S&P and those lows from the beginning of October— euro and the pound, I should say, uh, from the beginning of the October here. And we have just been pushing higher. So it's one thing to bear in mind with these currency pairs as they do push on. And we are looking, you know, percentage-wise, certainly for the Aussie anyway, up near 4%. The We know it's done more than that, uh, and the euro from that low, probably looking at about 2 and a bit, 3, yeah, 2.5. You know, these currencies do push on. Worth keeping an ear to the ground on any central bank speak from, uh, their own central banks, uh, to become perhaps a bit more dovish. I do believe in coming time there'll be a good opportunity to go short euro-dollar, short Aussie dollar, and a bit of dollar strength coming back into the market. That seems not to be the case just, uh, just for now. Also overnight, and it went under the radar, uh, really, we had earnings out of Apple and Facebook, which if there wasn't a central bank meeting from the FOMC would have definitely been more of a market mover. So it went under, under the radar. Both beat expectations, and it's kind of like swept under the carpet now, and, uh, and move on. Apple's fourth quarter, the company posted earnings of 3.03 per share, uh, when an expected of 2.83. Facebook 2.12 versus the 1.91. Of course, could go into more detail, but the markets have really forgotten about that now, and a case of just sort of moving on. Also overnight, Bank of Japan, uh, hinting they're willing to cut interest rates further had tweaked its forward guidance with an explicit hint it was willing to cut rates further into negative territory as part of a new effort to achieve its 2% inflation target. 8 to 1 majority. Overall reaction was, was pretty limited. It was as expected, and really a role of the Bank of Japan to, to meet market expectations, which was dealt with quite well. The decision to tweak forward guidance suggested that Bank of Japan did not want to disappoint expectations, and the economy, the Japanese economy, was strong enough to get through a period of sluggish global demand without the need for directional additional easing yet. Looking at the calendar for the day ahead, it's a two-pager. Always good to see that, um, on the, on the sheet. Let's have a quick run through as we go. What we're coming up to, 8:30 now, a big chunk of data out 10 o'clock. You've got Italian inflationary numbers, European GDP as well. You've got the flash, uh, year-on-year numbers as well. So quite a lot coming out at 10. So European assets, I would say from 9:30, just a case of cleaning up the order book and preparing for that. Then going into midday, you've got personal income out of the US. You've got core PCE. We know the Fed look at that. You've got GDP out of the Bank of Canada. We saw their reaction to rates yesterday as well. Chicago PMI 145, obviously still everything an hour earlier than normal. And then you've got only one speaker with no comments really have come through yet. Some earnings to be aware of as well, but none of the real big companies, they're done for the week. Shall we say. Looking at tomorrow, of course we've got, um, non-farm payrolls, ADP yesterday. Um, I'm sorry, I wasn't looking at the, uh, the calendar there, but, um, I said the times. Uh, having a look at tomorrow, you've got obviously non-farm payrolls, uh, and with ADP only coming in a tiny bit expected, not really giving too much in the clue of a hint whether that could be much better, uh, or worse. Obviously unemployment rate, average hourly earnings coming out as well. Got some Japanese data, Australian data, Chinese data overnight, and then a few speakers as well. And of course Lagarde taking office. Quick shout out to Mario Draghi on his last day. Let's have a quick look over the key moments, uh, over the last, uh, what we're talking now, 8 years. So cutting rates on the within first few days of ECB president. Anyone that's done the, uh, the sales and trading, or don't know, the portfolio management simulation from, from Amplify will remember that well. Uh, the whatever it takes speech, cutting rates below zero, QE launched, uh, and then ending, uh, back in 2018 before this new package has come through. The euro, of course, has been on a bit of a journey. I remember When I first started trading, 2014 into '15, a lot of talk was about the euro against the dollar going to parity. It's never quite materialized there, recovered a bit, and then obviously we've seen the dollar strengthen over the last couple of years quite dramatically. But are we— have we seen— is the worst now behind us for the euro? I suggest not, but time will tell. Something nice to finish on, a couple of facts on Berco. How much does the speaker speak? So here, going back to the 1920s, proportion of all words in common spoken by Mr. Berko and previous speakers. It's not really a surprise to see he is at the top there. And I'll put these on my Twitter as there's some words that I'm not even going to try and say. But here's some of the words that he's used more times than that no other speaker said in 100 years. Years. Chuntering has been said 173 times. But yeah, many of those I, I won't be able to, to pronounce as well. But shout out to, to Draghi, to Berko. Good luck to Lagarde starting tomorrow. There is no Brexit today, that's obviously been pushed down. In summary, the Fed, a hawkish cut turned dovish, initial reaction. The pound, I'll just be keeping an eye out for Farage and his comments are, if the Brexit Party stand down, the pound is a buy. And of course, over the coming days, I'm sure there'll be some polls to keep an eye on as well. Hope you'll have a good, good day ahead. Any questions, as usual, please do let us know.