Fed and BoE cut lending rates by 25bps

The US Federal Reserve elected to cut rates by 25bps at their meeting yesterday. The reduction takes the upper bound of the Fed funds rate to 4.75%. The move had been widely anticipated, given the steady downward trend in the Fed’s preferred inflation measure in recent months, with the September PCE index only marginally above the 2% target, at a value of 2.1% y/y. The results of the US election this week have raised uncertainty about the likely path of inflation in 2025 and beyond, with many of the policies put forward during the campaign having the potential to stoke inflation.

Similarly, the Bank of England’s monetary policy committee voted 8-to-1 in favour of cutting lending rates by 25bps, taking the bank rate to 4.75%. Since cutting rates for the first time in August, inflation has fallen below the Bank’s 2% target, with headline CPI falling to 1.7% y/y in September. However, with the UK Labour Government unveiling a large loosening in the budget at the end of October, there may be some new sources of upside risk to the outlook for inflation. The BoE’s latest round of forecast have the budget adding an additional 0.5 percentage points to inflation at its peak.

US Initial jobless claims rose marginally in the week ending 2 November, increasing to 221k from 218k the week prior. The outturn was broadly consistent with consensus expectations for a rise in claims to 222k. Continuing benefit claims rose to 1.89m in the week ending 26 October, while that leaves the measure at its highest level since November 2021, recent storms and strike activity may still be influencing the number.

Today’s Economic Data and Events

• 19:00 US University of Michigan sentiment survey (Nov). Forecast: 71

Fixed Income

• US treasuries regained some ground on Thursday, as the Fed cut rates by 25bps. The 2yr yield fell 6bps to 4.1994%, while the 10yr yield declined by 10bps to close at 4.3257%.
• Moves in European bond markets were mixed on Thursday. 10yr UK gilts yields fell by 6bps to 4.4971%, on the back of a 25bps cut by the BoE. The 10yr Bund yield rose 4bps to 2.444%, amid growing concerns that debt might rise under a new German government.

FX

• The dollar weakened against a basket of major peer currencies on Thursday, driven by the Fed rate cut. The spot index fell by 0.6% on the day. EURUSD gained 0.7% to 1.0805, GBPUSD rose 0.8% to 1.2987 and USDJPY fell 1.1% to 152.94.
• Commodity currencies also gained against the dollar on the day. AUSUSD gained 1.7% to 0.6679, NZDUSD rose 1.4% to 0.6025, and USDCAD fell 0.6% to 1.3861.

Equities

• US equity indices saw a third straight day of gains on Thursday, driven by the Fed rate cut. The S&P 500 rose 0.74% and the NASDAQ gained 1.51%, while the Dow Jones ended the day broadly flat. Moves in European equity markets were also largely positive. The Eurostoxx 50 gained just over 1%, the CAC 40 rose by 0.8%, and the Dax gained 1.7%. The FTSE 100 dropped 0.3%, weighed down by BoE warnings about the potential inflationary impact of the new budget.
• Locally, the DFM rose 0.6% and the ADX gained 0.5%.

Commodities

• Oil prices rose on Thursday. Brent futures rose 0.95% to USD 75.63/b, while WTI gained 0.93% to reach USD 72.36/b.