Daily Brief

Displacement therapy

The Fed does its bit

Prior to yesterday, the last time the Federal Reserve had delivered an unscheduled “emergency” rate cut was in March 2008, when the funds rate went down by 0.75% to 2.25%. That year as a whole saw the funds rate fall from 4.25% to 0.125%. Tuesday’s 0.5% cut was less dramatic and, arguably, less effective.

Having warned at the end of last week that it was “closely monitoring developments”, the Fed’s announcement yesterday ought not to have come as a great surprise. Even so, it evidently took investors aback. A move that was supposed to have boosted risk appetite and equity prices had quite the opposite effect with 10-year treasury note yields falling below 1% for the first time as the flight to safety recommenced. It looked a lot as though investors were worried because the Fed had told them they ought to be.

They were already in a mood to be disappointed, following the G7 conference call and statement. It was just as woolly as some had feared, with “G7 finance ministers and central bank governors standing ready to cooperate further on timely and effective measures”. For now, all that can realistically be expected is more rate cuts, which are of doubtful utility when the problem is a shortage of supply and demand, not the cost of money.


GDP surprises

Amid the over-excitement of the Fed’s emergency rate cut, scant attention was paid to the economic data. None of them had anywhere near the impact of Jerome Powell and his team.

Switzerland’s 0.3% expansion of fourth quarter gross domestic product, reported here yesterday, was the first of the theoretically important numbers. Next came the South African data which showed a much sharper than expected 1.4% slowdown in Q4. Their cost to the rand was a fraction of the gains it scored following the Fed announcement, and the ZAR was an average of 0.2% higher on the day.

Although with a slightly different slant, the same was true of the Australian dollar. The Fed rate cut was worth more to it than the larger-than-expected 0.5% expansion of Australian GDP in Q419. The most easily-ignored figures were for Euroland consumer prices. At a provisional 1.2%, inflation had zero implication for European Central Bank policy.


Watching the BoC

Just 24 hours after the Fed’s extraordinary policy shift, the Bank of Canada is scheduled to announce this afternoon whether it will follow suit. There would be considerable surprise if it were not to do so. The real question surrounds the size of the cut: 25 or 50 basis points.

There can be no doubt that central bankers are under pressure to be seen to be doing something, and the BoC will doubtless want to be seen to be playing the game. But legislators in Ottawa, as elsewhere, can be under no illusion that lower rates are the solution.

Other than euro zone retail sales and Brazilian GDP, most of today’s ecostats relate to the services sector purchasing managers’ index. The UK reading is forecast to be 53.3, which would put it above the equivalent measures from Euroland and the United States.

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