Fed dot plot bust, markets flat, BoE to stand pat

Morning Note

Ignore the dots. That’s the main message from the Fed and its chairman, Jay Powell, after another quarter point rate cut.

And well we might; when the dot plot shows 5 members (not all voting this year) think we’ll get a hike before the year is out. This is plainly unrealistic but goes to the heart of the problem in using individual members’ views on where rates will be in the future as a consensus for forward guidance. Decisions to cut or hike are binary and tangible; dots are like dreams; imaginary and fluid. They also cannot account for things when there is very great, and very real, uncertainty in the economy. The dots don’t work.

The Fed is steering a tricky course. At the heart of the matter is the conundrum of full employment and steady inflation in the US versus the risks from trade wars and the deterioration in the global economy. And so we’ve got the Fed cutting now to fit the market narrative.

The Fed doesn’t see any more rate cuts this year or next. That doesn’t mean they won’t – again the dots are not reflective of reality because ultimately there is way too much unknown right now. Maximum optionality is the best course of action when events are uncertain.

What else did we learn? Three dissenters – Rosengren and George wanted no cut, Bullard wanted a panic 50bps. No change to inflation forecasts despite the uptick in core CPI – the Fed is too relaxed. Growth is a little better in 2019, unemployment a touch higher. The FOMC is also clearly divided.

The market took this as a hawkish cut at first with the dots sketching no more cuts. But a decent and dovish performance in the presser sent the market back up. The S&P 500 ended higher at 3,006 having spiked as low as 2980. The Dow had a 260pt day from top to bottom, eventually closing at 27,147.

Powell let slip that they’d stop cutting rates ‘when we feel we’ve done enough.’ More cuts therefore seem assured, whatever the dots are telling us. Powell also said it was possible the Fed would need to resume organic growth of the balance sheet. On the repo mess, it was expected, just not to happen that badly. Technical adjustments were made to help but this did not influence the policy decision.

Elsewhere, the Bank of Japan is unchanged but certainly able and willing to do more.

Asia has been mixed and we’ve seen more red come across the board. European markets are still seeking direction and trapped in ranges. Futures not looking too hot – FTSE 100 set to open around 7302, with the DAX at 12385. CAC seen flat at 5623.

Gold went through the wringer but has stabilised close to the $1500 level having touched on support around $1482 in the immediate aftermath of the Fed decision. Yields on US 2s and 10s drove higher.

Oil has founds its feet again after touching on $57.50 as bears try to close the gap to last Friday’s close. Sentiment around Saudi Arabia’s supply problems has evidently improved greatly since Monday but there is still a risk premium being attached. The worry for oil bulls is that this blows over and we’re reset to where we were before. The tendency is for the risk premium to fade unless there is further trouble, escalation etc – traders can have very short memories.

Coming up – the SNB and BOE round off the central bank day. The Swiss National Bank is probably going to follow the ECB lead and cut. The Bank of England will have to hold still. The latest inflation data (1.7%), coming after a run of weaker GDP and PMI figures, certainly indicates the next move is down not up, but the MPC may just about maintain its notional tightening bias, albeit a tad reluctantly you feel. A shift there could be negative for the pound. Cable is steady at 1.2470 ahead of the announcement. Ultimately the Bank’s hands are tied by Brexit  – no change until we’re out – but it could shift its bias based on the economic data.