Fed disappoints everybody


The announcement of a quarter-percentage-point cut to the federal funds rate was not a surprise. What created the stir on Wednesday was the slightly incoherent message from Chairman Powell at his press conference. Journalists were keen to discover whether Mr. Powell saw the cut as a one-off or the beginning of a sequence. He chose to label it a "mid-cycle adjustment". Pressed on the matter, he said it was "not the beginning of a long series of rate cuts" but nor was it "just one, or anything like that". 

Investors decided that the Fed is less dovish than they had believed, and it does not intend to do everything in his power to keep stock markets inflated. That conclusion was bad for share prices and good for the USD, which came top among the major currencies.


Yesterday's news of slowing growth and inflation in the euro zone was not softened by data that showed Italy stagnating over the quarter and the year. Nor were this morning's manufacturing sector purchasing managers' index readings of much help to the EUR. Once again, Germany delivered the weakest number - 43.2 - and France, Italy and Spain failed to break even. Greece came in with the strongest reading at 54.6 but that made little difference to 46.5 figure for Euroland as a whole.

The euro was not obviously distressed by any of the numbers, though they clearly did it no favours. It is 0.9% lower on the day against the USD, principally as a result of the Fed being less dovish than expected.


After a 12-day famine, the statisticians threw investors some Canadian economic statistics on Wednesday. Sharp falls for industrial product and raw materials prices were balanced by a 0.2% monthly expansion of GDP.

A 1% fall in the price of WTI was not positive for the CAD. It lost 0.5% to the USD, not as a result of lower oil prices or unconstructive data but because the USD moved higher following the Fed chairman's press conference.


As with every other currency, the pound lost ground to the USD as a result of the market's snap reappraisal of where US interest rates are - or, more accurately are not, - going. It is 0.4% lower on the day, despite looking quite buoyant towards the end of the London session. Britain's manufacturing PMI this morning was unchanged and in line with forecast at 48.0. It stacked up reasonably well against the readings from mainstream Europe, which ranged between 43.2 and 49.7.

Today the Bank of England is expected to keep interest rates unchanged. For investors the things to watch will be the minutes of the policy discussion and, half an hour later, the presentation of the bank's quarterly Inflation Report by governor Mark Carney. The good doctor has had a week to come to terms with a new government seemingly indifferent to the survival of the economy or the currency. Perhaps he will share his thoughts.


Until the Fed chairman said his piece yesterday, the JPY was floating smoothly along relative to the USD. As soon as investors decided that US rates might not be falling as far or as fast as they had assumed, they marked down the yen. It is 0.5% lower on the day.

Following the figures for cross-border investment flows, Japan's manufacturing PMI came in at 49.4, almost unchanged from June's 49.3. It did little for the yen. 

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