Investors expect cut to US interest rates today
Although Wall Street looks subdued, investors are expecting a cut to US interest rates today, and possibly a large cut.
According to CME’s Fedwatch tool, there’s a 65% chance that the Federal Reserve cuts US interest rates by half a percentage point today.
That leaves a 35% chance of a smaller, quarter-percentage-point, cut.
Currently, the Fed’s target rate is 5.25%-5.5%.
This level of uncertainty means there’s likely to be a strong market reaction when the Fed announcement is made at 2pm Eastern time (7pm UK time).
You’d have to go back over 15 years to find such an uncertain situation this close to the decision, says Jim Reid, market strategist of Deutsche Bank.
He told clients:
A lot of money will be made and lost today.
I’ve waivered both ways over the last few days and I’m surprised the Fed has left pricing so uncertain at this stage. However in an era of heavy forward guidance it’s refreshing to see a little less certainty. If that was more widespread I think it would be more rather than less helpful.
If you think you know exactly what the central bank will do it is likely to promote more over exuberance in markets which in turn requires a bigger opposite reaction later. I’m sure they’ll be those taking the opposite view though.
Key events
There is a risk that Fed chair Jerome Powell disappoints market expectations today, warns Matthew Ryan, head of market strategy at global financial services firm Ebury.
Ryan suggests that those expecting a large cut to US interest rates today by the Federal Open Market Committee (FOMC) will be disappointed, saying:
While we think that the Fed is perhaps somewhat behind the curve in lowering rates, we do not think that conditions are bad enough to warrant panic stations.
“A 50 basis point cut does not appear to be in the offing, nor do we think that the FOMC will be prepared to fully endorse market pricing for rates.
For now, we see a total of three 25 basis point cuts this year, in September, November and December, with another four or five to follow in 2025, depending on incoming data. Any indication from the Fed that a gradual pace of cuts remains their base case could provide some near-term upside for the dollar, particularly given the dovish market pricing.
Wall Street trading begins, calmly
The Wall Street opening bell has been rung, and – as expected – trading had begun calmly.
The S&P 500 index of US stocks has risen by 0.09%, or 5.2 points, to 5,639.8 points, towards the record high set earlier this week.
The tech-focused Nasdaq index is almost 0.2% higher.
But the Dow Jones industrial average, which tracks 30 large US companies, dipped by 0.04% at the open.
What a Fed rate cut means for you….
My colleague Lauren Aratani has analysed the impact of a cut to US interest rates, here:
Not every Wall Street expert expects a bumper 50 basis point cut to US interest rates today.
Bob Savage, head of markets strategy and insights at bank BNY Mellon, predicts the Federal Reserve will start its easing cycle today with a more modest 25 basis point (or quarter-point) cut to rates.
He says there are three reasons for the Fed to take a more cautious approach – including that a 50bp cut might scream ‘panic’.
Savage told clients today that the logic of the BNY call for 25bps has three legs.
First that the politics of doing 50bps will hurt the independence of the Fed as it will blow into the US election if it sends asset prices higher; second is that the market prices in easy policy already so any recalibration of front-end cuts will likely only lead to rethinking the back-end so economic effects are small, and third that the 50bps would be a signal of panic – something reserved for bigger troubles of recession or disaster.
Investors expect cut to US interest rates today
Although Wall Street looks subdued, investors are expecting a cut to US interest rates today, and possibly a large cut.
According to CME’s Fedwatch tool, there’s a 65% chance that the Federal Reserve cuts US interest rates by half a percentage point today.
That leaves a 35% chance of a smaller, quarter-percentage-point, cut.
Currently, the Fed’s target rate is 5.25%-5.5%.
This level of uncertainty means there’s likely to be a strong market reaction when the Fed announcement is made at 2pm Eastern time (7pm UK time).
You’d have to go back over 15 years to find such an uncertain situation this close to the decision, says Jim Reid, market strategist of Deutsche Bank.
He told clients:
A lot of money will be made and lost today.
I’ve waivered both ways over the last few days and I’m surprised the Fed has left pricing so uncertain at this stage. However in an era of heavy forward guidance it’s refreshing to see a little less certainty. If that was more widespread I think it would be more rather than less helpful.
If you think you know exactly what the central bank will do it is likely to promote more over exuberance in markets which in turn requires a bigger opposite reaction later. I’m sure they’ll be those taking the opposite view though.
The rates on US mortgages have been falling as the markets have anticipated cuts to US interest rates – leading to a pick-up in demand.
The average contract rate on a 30-year fixed-rate mortgage dropped 14 basis points last week to 6.15%, the Mortgage Bankers Association reported today. That’s the lowest rate since September.
The MBA has also reported that mortgage applications for new home purchases increased 4.4% compared with a year ago, but were flat compared with July.
Joel Kan, MBA’s vice president and deputy chief economist, says:
“Applications for new home purchases continue to show year-over-year growth, increasing by more than four percent and extending the annual growth streak to 19 consecutive months.
Homebuyers, including a growing share of first-time buyers, continue to favor newly built homes, as declining mortgage rates in August contributed to the uptick in new home sales activity.”
Wall Street subdued ahead of Fed decision
The US stock market is on track to open slightly higher in an hour’s time, as traders brace for the Federal Reserve’s interest rate decision later today.
The Dow Jones Industrial Average, the S&P 500 and the Nasdaq are all slightly higher in pre-market trading.
Both the Dow and the S&P 500 touched new alltime highs this week, on hopes that the US economy will achieve a ‘soft landing’ (lowering inflation while avoiding a recession).
Trevor Greetham, head of multi asset at Royal London Asset Management, says Fed rate cuts are bullish for stocks… in a soft landing scenario:
The Federal Reserve is cutting rates for the first time since March 2020. What happens to financial markets in the months to come will depend on the macro backdrop.
Rate cuts amid disinflationary growth are bullish for stocks. If a US recession takes hold however, rate cuts don’t prevent a bear market and you could look to buy stocks on the Fed’s last rate cut, not the first.
There’s a more consistent pattern for government bonds, which typically perform strongly either way.
Aslef train drivers vote to back pay deal and end two-year stand-off
Jack Simpson
Newsflash: Train drivers have voted overwhelmingly to accept a multi-year pay deal,
The decision resolves the last remaining conflict between rail operators and unions after two years of strikes that have brought misery for passengers.
Members of the driver’s union Aslef voted overwhelmingly to support the pay offer put forward by the Department for Transport (DfT) last month, which would result in a pay rise of almost 15% over three years.
The approval by 97% of Aslef’s more than 20,000 members brings an end to the union’s dispute with 16 train operating companies in England, which began in July 2022.
Drivers have taken 18 days of strike action since then, resulting in a near complete shutdown of English lines and some cross-border services, as well as a run of overtime bans that have caused widespread disruption.
More here:
Although the headline rate of UK inflation was unchanged last month, there were some significant price swings among the items in the “basket” that tracks the cost of living.
The biggest movement was in the cost of air travel, with average prices jumping by 11.9% in the year to August, having fallen by 10.4% in the 12 months to July, PA Media reports.
Butter and low-fat milk both saw similar swings from negative to positive inflation, with the price of butter up 0.9% in the year to August after falling 3.9% in the year to July, and low-fat milk rising 0.3% in August after dropping 0.4% in July, according to figures published by the Office for National Statistics (ONS).
Inflation accelerated for a range of everyday items, including the cost of cinema, theatre and concert tickets, which rose 9.2% in the year to August compared with a jump of 4.4% in the 12 months to July; the price of pizza and quiche, up 4.3% in August after a rise of 0.8% in July; chocolate, up 10.0% last month compared with 6.7% in July; women’s clothes (up 3.9% in August, up 2.6% in July); and bread (up 2.2% in August, up 1.1% in July).
Some items saw prices falling less slowly last month than in July, most notably second-hand cars, the average cost of which dropped by 6.6% in the year to August, having fallen by 8.4% in the 12 months to July.
The price of household furniture was down 1.0% in August, a smaller annual drop than 2.4% in July, and there were similar trends for the average cost of fish (down 3.0% in August after falling 4.2% in July), fruit and vegetable juices (down 0.4% in August, down 1.3% in July) and rice (down 2.3% in August, down 2.7% in July).
By contrast, the rate of inflation eased last month for tea (up 3.5% in the year to August compared with a jump of 8.4% in July), mineral water (up 2.8% in August, up 5.2% in July), ready meals (2.1% August, 4.2% in July), train travel (2.2% August, 3.7% July) and men’s clothes (1.2% August, 2.6% July).
Rents and house prices in London diverged this summer.
The capital saw the fastest rental increase of any area of England, with rents jumping by 9.6% year-on-year in August.
But… London was also the only area where house prices fell in the year to July:
Economists: Next UK interest rate cut likely in November
Today’s inflation report should ‘“dispel the remaining hopes” held by some in the market that the Bank of England might move on interest rates ahead of its November meeting, say analysts at RBC Capital Markets.
Luke Bartholomew, deputy chief economist at abrdn, agrees, saying:
“It is hard to see this inflation report changing many minds at the Bank of England, with the data coming in pretty much exactly as expected.
Certainly the fact that headline inflation is a touch above target will come as no surprise to policymakers. Of greater focus will be the fact that various measures of underlying inflation are still quite elevated. That helps explains why the Bank of England is likely to be somewhat more cautious than the US Federal Reserve in its easing cycle over the next few months.
Indeed, the Bank of England now looks extremely likely to keep rates on hold tomorrow with the next cut probably coming in November.”
ING: Core services inflation is slowing
Looking, back at the UK inflation report…. ING have calculated that ‘core services inflation’ dropped last month.
As we reported earlier, service sector inflation jumped from 5.2% to 5.6% in August – but ING’s maths suggests the underlying picture is better.
James Smith, ING’s developed markets economist, explains:
Beneath the surface of the latest UK CPI report, there are signs that the inflation story is slowly but surely moving in the right direction. That might sound weird, given that services inflation rose from 5.2% to 5.6% in August. Remember this is the guiding light for the Bank of England when it comes to rate cuts, and although today’s move was widely predicted, it looks like it is moving in the wrong direction.
Appearances can be deceiving. The fact is that the recent nudge higher in services inflation is largely thanks to base effects and higher inflation in price categories the BoE appears to care less about. We’ve calculated a measure of “core services” inflation, based on something the Bank put in its May Monetary Policy Report.
That excludes volatile categories like airfares, package holidays, and rents, arguably less relevant for monetary policy decisions. If our maths is correct, that’s now fallen to 4.9% from 5.5% just two months ago.
That would please the Bank – although probably not enough to prompt an interest rate cut tomorrow, though….
Post Office CEO Nick Read will leave the organisation on 15 March next year, the company says.
That means he’ll be able to testify to the next phase of the Horizon inquiry on behalf of the Post Office, and in a personal capacity.
In a statement, the Post Office says:
In November 2019, Nick led the settlement with the Group Litigation claimants, beginning the journey to address the wrongs of the past and to reset the relationship with Postmasters that continues today.
He championed the appointment of two serving Postmasters to the board and focused on increasing Postmaster remuneration, investing in training, expanding field teams and supporting Postmasters as part of a broader initiative to place today’s Postmasters at the heart of Post Office.
TGI Fridays owner to file for administration
The company behind the TGI Fridays chain is calling in administrators, a week after a attemped takeover of US-based franchisor TGI Fridays failed.
Hostmore has decided to appoint administrators from Teneo, and will also suspend trading in its shares, whose value has fallen to almost zero.
Hostmore has told the City that it is trying to find a buyer for its sites in the UK, and expects to conclude a sale by the end of September. However, it does not expect to recover enough money to cover its borrowings.
Its sites remain open.
IMF postpones Russia mission after EU backlash
The International Monetary Fund (IMF) has postponed plans to visit Moscow to review the Russian economy, following a backlash from European capitals.
The Tass news service has reported that the IMF has “indefinitely postponed” its first planned consultations with Russia.
According to Tass, Alexei Mozhin, Russia’s director at the IMF, blamed “technical unpreparedness”, saying:
“The Fund’s management notified the Russian side and the board of directors that the mission’s work would be postponed indefinitely.
“Technical unpreparedness of the mission to conduct consultations was mentioned as the reason for postponing the mission.”
Last week, the finance ministers of Lithuania, Latvia, Estonia, Finland, Sweden, Iceland, Denmark, Norway and Poland expressed their “strong dissatisfaction” with the IMF’s plans to visit Russia.
On the 8.4% jump in UK rents in the year to August, ONS head of housing market indices Aimee North says:
Rental prices continue to climb at a near-record rate, although the pace of the increase has slowed slightly.
London again saw the fastest growth in rents, with the slowest rise in the South West of England.
Post Office chief executive Nick Read to step down
Post Office boss Nick Read is set to step down from the role next year, the company has said.
Read says it has been a “great privilege” to have worked as Post Office chief executive in an “extraordinarily challenging time for the business and for postmasters”, adding:
“It has been a great privilege to work with colleagues and postmasters during the past five years in what has been an extraordinarily challenging time for the business and for postmasters.
“There remains much to be done for this great UK institution but the journey to reset the relationship with postmasters is well under way and our work to support justice and redress for postmasters will continue.”
Today’s announcement comes after more than a year dominated by the fallout from the Horizon IT scandal, in which hundreds of post office operators were wrongfully inprisoned.
In July, Read said he was temporarily stepping back from the CEO role so he could give his “entire attention” to the next stage of the inquiry into Horizon.
Read became CEO of the Post Office in September 2019, succeeding Paula Vennells, who forfeited her CBE for “bringing the honours system into disrepute” over her handling of the Horizon IT crisis.
In February, the business and trade committee of MPs expressed a lack of confidence in Read’s leadership, accusing him of giving misleading evidence.
Read also denied a claim made by the former chair of the Post Office Henry Staunton that he had threatened to resign unless he was paid more. He was “exonerated of all misconduct allegations” following a report into his behaviour earlier this year.
Snap! Inflation across the euro area was 2.2% in August, matching the UK’s inflation rate.
Data provider Eurostat reports that inflation across the euro area fell last month, from 2.6% in July.
Inflation across the European Union was higher, at 2.4%.
Eurostat adds:
The lowest annual rates were registered in Lithuania (0.8%), Latvia (0.9%), Ireland, Slovenia and Finland (all 1.1%). The highest annual rates were recorded in Romania (5.3%), Belgium (4.3%) and Poland (4.0%). Compared with July 2024, annual inflation fell in twenty Member States, remained stable in one and rose in six.
