The Fed Holds, Canada Hikes and the Budget Underwhelms
Good morning
For this week, US data releases will be one hour earlier at 12.30 or 14.00 london time due to the clock changes.
In addition, FX option expiries will be 14.00 london time, not the usual 15.00 london time.
The Fed did choose to leave rates on hold at yesterday’s meeting, as I expected there were two dissenters, Hammack and Cook, who looked for a rate rise with Logan this time choosing to go with the majority. Little In the way of forward guidance came from Warsh’s press conference as we anticipated, key points were that the economy has strengthened but isn’t running hot, financial conditions could be tighter and inflation expectations must stay anchored. A Dec rate rise is possible but not a certainty. We’ll only have seven rate meetings next year, down to six the following year.
We have seen a very mildly weaker US dollar since the meeting yesterday evening, GBPUSD is currently 1.3315 and EURUSD 1.1140, maybe 30-40 pips off yesterday’s lows. GBP is holding gains against the single currency with GBPEUR now 1.1950. Indeed, GBP has been stable since the budget which seemed to bring lots of small measures but nothing of major substance which means the gilt markets can breathe a sigh of relief, with UK gilt yields back towards recent lows.
Whether you are a fan of the Conservatives or not, you have to agree that Kemi is pretty good in opposition. She tore into the budget and some Labour front benchers with some well-timed quips. One thing she said that did grab my attention was that working age welfare now costs £4,000 for every tax payer. That is an extremely high level and something that any incoming government will have to change. We really do seem to be a welfare state and it isn’t a good look.
OBR forecasts were not particularly pleasant, they see some £65 billion more in borrowing for the next four years forecast in march. No surprise that OBR sees inflation at 3.5% in 2027 compared to 2% as forecast in March. 2026 growth forecasts have been graded by 0.1% to 1.2%, but 2027 forecast has been slashed from 1.6% to 1%.
BoC raised rates 25bps to 2.5% in order to combat rising inflation as expected. Macklem made several references to inflation, it is clear he thinks inflation can continue to rise, particularly with the lack of a peace deal in the Middle East, and seems open to further rate rises if necessary. They did lift Canada’s 2026 and 2027 growth forecasts, USDCAD was ;pushed lower by both the BoC but also the weaker USD post-FOMC, reaching a low of 1.3970 before recovering to 1.3990 this morning. The USDCAD options I looked at yesterday seemed to be on the right track and has at least given us something to trade spot against for very limited risk.
Oil prices have been elevated since US reportedly warned Gulf states that short but intense military action against Iran was likely after the midterm elections. They did drop yesterday evening on reports US have reached out to Iran in an attempt to restart peace talks.
RBNZ’s Breman has said there is a high chance of a rate rise in December after the surprise hold at the meeting earlier this week. Delaying the inevitable really but I guess there may be a hope that if, and that is a big ‘IF’, we were to see some peace in the Middle East in the next couple of months then maybe it would be enough to allow inflation to fall back. Still, at this stage further tightening is highly likely. NZD a smidge higher with AUNZD 1.2525 and GBPNZD 2.3700.
In football, Man City beat Brighton and Liverpool beat Chelsea, both matches going to penalties. Bournemouth’s winning streak continues with a solid 3-0 win over Villa. In cricket, England in action right now against Sri Lanka in another ODI. England are currently 99/0 which looks good but as we know from other matches in the series, anything can happen, and it usually does. I believe the old F1 commentator Muarry Walekr was responsible for that little phrase.
We have a busy calendar again today with US Q3 GDP and September core PCE, one of the Fed’s favoured inflation measures, both potential market-movers. I’d imagine any lower core PCE reading could well lower Fed Dec rate rise thinking and send USD lower. We are expecting to see no change from the ECB rate announcement but Lagarde is likely to be quizzed over French bond markets, particularly the spreads over German and Italian yields, and whether she has any plans to intervene if things get out of control. She may well be asked about her future after recent speculation she will leave ECB to join WEF.
Japan inflation and BoJ rate meeting overnight, they are expected to keep rates unchanged. USDJPY currently a few pips below 158, with GBPJPY a few pips above 210.
Have a great day…
- 10.00 EU consumer confidence
- 12.30 US GDP, core PCE, initial jobless claims, personal income/spending
- 13.15 ECB rate announcement
- 13.45 ECB press conference
- 23.30 Japan Tokyo CPI, unemployment
- 23.50 Japan retail trade
- 00.30 AUS PPI
- 03.00 BoJ rate announcement
- 06.30 BoJ press conference