Markets are under pressure at the open on Thursday, as Europe takes the lead from the US and dives on a hawkish rate cut from the Federal Reserve.
Traders are really struggling to come to terms with the fact that the Fed has not been bluffing and won’t simply act as instructed by the markets and the White House. Of course, the central bank in many ways was backed into a corner when it comes to a rate cut but there is clearly still plenty of fight in it yet and more rate cuts this year is not the foregone conclusion that markets would have us believe.
While Powell did indicate that this isn’t necessarily a “one and done” situation, his characterization of the cut as a “mid-cycle adjustment” sent a very different message than investors wanted to hear. The President wasn’t particularly impressed with it either, wasting no time in taking to his Twitter account to lambaste the Fed Chairman once again and suggest it should be the start of an aggressive and lengthy cutting cycle, despite repeatedly claiming the US economy is the best its ever been.
With central banks increasingly becoming the only game in town as far as the stock market rally is concerned, it could be a very interesting summer unless policy makers manage to reassure investors that a mid-cycle adjustment can include the multiple rate cuts they crave.
BoE next in the firing line
The Bank of England is next in the firing line today, as traders try to determine what its response will be in the event of an increasingly possible no-deal Brexit. Super Thursday is usually a major event when we learn a lot about the central bank’s outlook for the economy and interest rates but this time in three months, the UK may be experiencing the first hours of a no-deal Brexit reality, which makes the job of forecasting outrageously difficult.
This naturally raises the question of just how valuable the new forecasts really are given that no-deal is far from the smooth Brexit that has previously been the basis for the BoE’s assumptions. I’m sure Carney and his colleagues will be heavily questioned on this today, as well as the impact of the tumbling pound as traders increasingly price in no-deal risks.
