The Fed reduces target rate 75bp to a range of 0% to 0.25%
16/12/08 21:53
The Fed reduced the target rate 75bp to a range of 0%
to 0.25% and was very aggressive in its accompanying
statement. The decision was unanimous, as the FOMC
said they were committed to keeping the rate at
"exceptionally low levels" for "some time." They did
not mention quantitative easing, but they remained
committed to using unconventional policy tools to
fight the recession. Possible tools include
purchasing long-term Treasury securities, purchasing
agency debt and mortgage-backed securities and
implementing the TALF, which could promote credit
extension to households and small businesses. Given
that the rate is essentially zero, UBS economists
feel like this was as aggressive as the Fed could
get. The FOMC decision came after a record monthly
decline in the CPI and a mixed start to the Q4
earnings season. CPI was -1.7%m/m (cons -1.3%) as
weak energy prices and a weak core CPI (0.0%m/m, cons
0.1%) drove down the reading. In corporate news, a
major US bank missed earnings but a large retailer
managed to beat expectations. With downbeat
expectations for earnings season, there is a greater
chance of surprising results to the upside. The
automaker story continues, with press reports
suggesting the Big Three may yet be given access to
TARP funds. However, for the automakers to receive
more than the $15bn left under the first tranche of
TARP, the Bush administration will likely have to
make concessions with Congress in order to access the
second tranche. In other news, OPEC will discuss
production cuts when it meets today, with reports
suggesting a cut of about 2 million barrels per day.
With the Fed's aggressive stance and the ebbing of
repatriation flows, the dollar is being aggressively
sold in the short-term. However, there is still a
premium on liquidity, which will be supportive to the
dollar even in the current environment. We view this
recent weakness as a correction and we maintain our
base case of further, but choppy, dollar strength.
German PMI manufacturing hit a new all-time low (33.5 vs cons 34.6) while the German PMI services came in above expectations (46.4 vs cons 44). The services figure is lagging the industry, so UBS economists expect further weakening ahead for that reading. Both indicators show that employment is likely to worsen in coming months. The Eurozone PMI manufacturing and services were both broadly in line with consensus, but were still at all-time lows. With all the series close to the lows, it is likely we will see a contraction in Q4 GDP and possible into Q1 2009 as well. From a macro perspective we remain of the view that the continued deterioration in growth data will increase the need for the ECB to ease rates further. However, ECB president Trichet said that at the current stage he feels there is a limit to the decrease in rates. Other ECB members also highlighted that the impact of the most recent easing in rates needs to be evaluated before deciding on further steps, indicating a retreat from an aggressive stance on monetary policy. The recent commentary has cast some doubt on whether the ECB will cut again on January 15. This all comes ahead of Eurozone CPI data, which is expected to show a month-over-month decline for November (cons -0.5% m/m, prior 0.0%). That said, despite the poor PMI data and a likely weak Ifo reading ahead, a hawkish ECB is supporting EUR for now. This looks set to continue into year end. However, my view is that EUR will begin to weaken again when the FED reaches bottom and the ECB has to cut rates further. Stay tuned.
GBP: BoE minutes
BoE's minutes for its rate decision to lower policy rates by 100bps are due on Wednesday and unanimous decision will not be a surprise, given increased downside risks to UK economic growth and deflationary concerns. Labour data, also due on Wednesday, is likely to show declines and we expect October ILO unemployment rate to be at 5.8% while markets looks for a rise to 6.0% from 5.8% currently. On Tuesday, the CPI came in slightly higher than expected at 4.1%y/y (cons 3.9%, prior 4.5%) but was lower than the October reading. Core CPI was 2.0% (cons 1.8%, prior 1.9%). With the economy in a slide, inflation expectations have sharply fallen. The market is expecting another 50 bps cut in rates at the January 9 meeting to take the policy rate to 1.5%. Rates views, more weak data and likely negative comments from the BoE minutes are likely to keep the GBP heavy for now in our view.
Ref: UBS
Make sure you have downloaded "Face the Trader Within" available in the free members section
You may also want to check out this latest video on Bloomberg where a host of fx strategists are commenting on GBP
Chris Lori
German PMI manufacturing hit a new all-time low (33.5 vs cons 34.6) while the German PMI services came in above expectations (46.4 vs cons 44). The services figure is lagging the industry, so UBS economists expect further weakening ahead for that reading. Both indicators show that employment is likely to worsen in coming months. The Eurozone PMI manufacturing and services were both broadly in line with consensus, but were still at all-time lows. With all the series close to the lows, it is likely we will see a contraction in Q4 GDP and possible into Q1 2009 as well. From a macro perspective we remain of the view that the continued deterioration in growth data will increase the need for the ECB to ease rates further. However, ECB president Trichet said that at the current stage he feels there is a limit to the decrease in rates. Other ECB members also highlighted that the impact of the most recent easing in rates needs to be evaluated before deciding on further steps, indicating a retreat from an aggressive stance on monetary policy. The recent commentary has cast some doubt on whether the ECB will cut again on January 15. This all comes ahead of Eurozone CPI data, which is expected to show a month-over-month decline for November (cons -0.5% m/m, prior 0.0%). That said, despite the poor PMI data and a likely weak Ifo reading ahead, a hawkish ECB is supporting EUR for now. This looks set to continue into year end. However, my view is that EUR will begin to weaken again when the FED reaches bottom and the ECB has to cut rates further. Stay tuned.
GBP: BoE minutes
BoE's minutes for its rate decision to lower policy rates by 100bps are due on Wednesday and unanimous decision will not be a surprise, given increased downside risks to UK economic growth and deflationary concerns. Labour data, also due on Wednesday, is likely to show declines and we expect October ILO unemployment rate to be at 5.8% while markets looks for a rise to 6.0% from 5.8% currently. On Tuesday, the CPI came in slightly higher than expected at 4.1%y/y (cons 3.9%, prior 4.5%) but was lower than the October reading. Core CPI was 2.0% (cons 1.8%, prior 1.9%). With the economy in a slide, inflation expectations have sharply fallen. The market is expecting another 50 bps cut in rates at the January 9 meeting to take the policy rate to 1.5%. Rates views, more weak data and likely negative comments from the BoE minutes are likely to keep the GBP heavy for now in our view.
Ref: UBS
Make sure you have downloaded "Face the Trader Within" available in the free members section
You may also want to check out this latest video on Bloomberg where a host of fx strategists are commenting on GBP
Chris Lori