The Chairman explained to us all
Preventing the ‘conomy’s stall
Required a cut
Of twenty-five but
Don’t look for, rates, further to fall

However, it’s not the nadir
For all rates, that’s certainly clear
Brazil cut a half
While BOJ staff
Will check if they’re now too austere

As I mentioned on Monday, the Fed was merely the first in a long list of major central banks meeting this week. By now we all know the FOMC cut rates by 25 bps and released a statement that was certainly more hawkish than many had hoped for expected. The vote was largely as expected, with the July dissenters, George and Rosengren, continuing to vote for no change, while this month, St. Louis Fed President James Bullard also dissented, voting for a 50bp cut. Of more interest was the dot plot, which showed five members forecasting no further cuts this year, five looking for one more cut and seven looking for two cuts. That is actually quite a bit more hawkish than expected going into the meeting. In the end, equity markets sold off initially, but rallied late in the day to close essentially unchanged. Treasuries rallied all day leading up to the meeting, but ceded those gains in the wake of the announcement and press conference while the dollar rallied against most currencies, although it has given back those gains overnight.

Powell’s explanation for cutting was that the committee was still concerned over issues like global growth, trade policy and Brexit, and so felt a cut was merited to help insure steady growth. My impression is Powell is not anxious to cut again, but arguably it will depend on how the data evolves between now and the October meeting.

Meanwhile, late yesterday afternoon the Central Bank do Brazil cut their SELIC rate by 50bps to 5.50%, a new record low for the rate, but also a widely expected move by the market. Inflation in Brazil continues to slow, and with growth extremely sluggish, President Roberto Campos Neto made clear that they expect inflation to remain quiescent and will do what they can to help bolster the economy there. Look for another 50bps this year and potentially more next year as well. It should be no surprise that the real weakened yesterday, falling 0.8%, and I expect it has further to fall as Neto was clear that a weaker currency would not deter him.

Then overnight we heard from a number of central banks with Bank Indonesia cutting the expected 25bps top 5.25%, while the HKMA also cut in order to keep step with the US. Both currencies, IDR and HKD, were virtually unchanged overnight as the market had fully priced in the moves. Arguably of more importance was the BOJ meeting, where they left policy unchanged, but where Kuroda-san explained that the BOJ would undertake a full review of policy by the October meeting to insure they were doing everything they could to support the economy. There were a number of analysts who were expecting a rate cut, or at least further QE, and so the disappointment led to a 0.5% rally in the yen.

When Europe walked in, there were three central bank meetings scheduled with the Swiss maintaining policy rates but adjusting the amount of reserves exempt from the deposit rate of -0.75%. While Swiss banks have been complaining about this, given there was already a tiered system it was not anticipated that things would change. The upshot is that the franc is firmer by 0.6% in the wake of the announcement, although traders are a bit on edge given the SNB was clear that intervention remained on the table.

The biggest surprise came from Norway, which hiked rates 25 bps to 1.50%. While several of the Norwegian banks were calling for the hike, the market at large did not believe the Norgesbank would raise rates while the rest of the world was cutting. But there you go, the situation there is that the economy is doing fine, inflation is perking up and because of the government’s ability to tap the oil investment fund, they are actually utilizing fiscal policy as well as monetary policy in their economic management. With all that in mind, however, they were pretty clear this is the last hike for the foreseeable future. NOK rallied 0.5% on the news, but it has given all those gains back and now sits unchanged on the day.

Finally, in what is no surprise at all, the BOE just announced that policy remains unchanged for the time being as all eyes turn toward Brexit and what will happen there. The UK also released Retail Sales data which was bang on expectations and so the pound remains beholden entirely to the Brexit situation.

Speaking of Brexit, today is the third day of hearings at the UK Supreme Court regarding the two lawsuits against the Johnson government’s decision to prorogue parliament for five weeks. If you recall, late Tuesday when word got out that the justices seemed to be very hard on the government, the pound rallied. Interestingly, this morning there are stories all over the press about how the likelihood of a no-deal Brexit seems to be growing quickly. Everybody is tired of the process and thus far, neither side has blinked. I maintain the EU will blink as the economic damage to Germany, the Netherlands and Ireland adding to the entire EU’s economic malaise will be too much to tolerate. But we shall see. As I have been typing, the pound has been edging lower and is now down 0.2% on the day, but in the big picture, that is the same as unchanged.

Turning to this morning’s US data, we start with Philly Fed (exp 10.5) and Initial Claims (213K) and then at 10:00 see Existing Home Sales (5.38M). Yesterday’s housing data, starts and permits, were much better than expected, which given the sharp decline in mortgage rates and still robust employment situation, should not be that surprising. As to Fed speakers, there is no one on tap for today, but three (Williams, Rosengren and Kaplan) due to speak tomorrow. Equity futures are pointing slightly lower right now and if I had to guess, the dollar is more likely to rally slightly than not as the day progresses although large moves are not on the cards.

Good luck
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