Market news 20 September 2019

Central banks still tilting dovish, though less so than the market was expecting at the height of the risk-off phase...

• The Federal Open Market Committee (FOMC) cut the benchmark overnight lending rate by 25bps to a target range of 1.75% - 2%, following with a statement little changed from their last meeting and reiterating their pledge to “act as appropriate” to sustain current expansion. The “dot plot” indicates that 7 of the 17 committee members regard another cut later this year as appropriate, whilst 5 envisage no change and 5 would have preferred not to cut at this meeting. President Trump was quick to criticise the policy stance elucidated at the meeting, tweeting that the central bank “fails again”, “no sense, no vision!”.
• The Bank of England voted unanimously to keep rates on hold at 0.75% and provided further (dovish) guidance on how they would act in a post-Brexit scenario. Regardless of the outcome of the Brexit negotiations, the MPC forecast for economic growth will likely be lowered given the domestic risks of a no deal Brexit and supply side concerns if there is a deal agreed. The MPC also warned that scenario 3 – an extension – would result in further uncertainty and excess supply in the economy, meaning growth will remain below potential.
• Bank of Japan also voted to keep monetary policy unchanged at their meeting September 18 – 19. In the context of heightened risks of US-China trade tensions, US monetary policy and the consumption tax hike planned for October, the bank have adopted a ‘wait-and-see’ approach this month but hinted possible action at their meeting in October.

...as US data exhibit a markedly more positive trend in the past couple of weeks

• The US produced a slew of more positive data ahead of the Fed meeting. Housing starts increased to 1.36m in August from 1.22m in July, building permits increased +7.7% month on month and the NAHB homebuilder sentiment survey ticked higher in September. Industrial production growth surprised to the upside in August at +0.6% month on month.
• Market volatility slumped this week after the relatively elevated levels that have prevailed since late July. Global equities were sideways to modestly higher and bond yields drifted slightly lower.
• Crude oil exploded higher at the start of the week following the drone attack (claimed by Houthi rebels) on a major Saudi processing facility over the weekend. The bulk of the move retraced as Aramco was able to confirm that the resulting supply disruption was much less severe than initially feared; however, Brent futures are still 7% higher than they were at the previous week’s close.