The US Fed cut its funds target by 50bp to 1.0% following this weekâ€™s FOMC meeting. The
statement noted that the economy had slowed markedly, in particular due to
weaker consumer spending, while inflation was likely to moderate. The Fed noted
that its raft of recent measures â€śshouldâ€ť promote â€śmoderateâ€ť growth, but
downside risks remain. The move was largely as expected (a number of economists
saw -25bp, money markets leant towards any surprise being a bigger move). The
Dow was briefly knocked into negative territory, but has since surged back to
reach new highs for the day.
Prior to the Fed statement, the broad USD
index had lost about 1.5%, as improved European risk appetite saw the greenback
lose safe haven/repatriation demand. NZD/USD pushed up from the low
0.57s in the London morning to highs around 0.59, briefly dipping
towards 0.58 after the Fed. AUD/USD chopped around in the 0.64s in London and early NY before ratcheting from 0.6500 to
just over 0.6700 as US equities ground out early gains.
EUR/USD whipped around a bit but overall gained about a
cent from late Asia to post-FOMC, at 1.2840. The DJ Euro Stoxx 50
rose 5.6%. USD/JPY traded relatively sedately in offshore trade, within
96.33â€“97.89, with the Fed statement trimming about 40-50 pips from the pair to
Also cutting rates overnight... The Peopleâ€™s Bank of China cut its benchmark
one year lending rate by 27bp to 6.66% and the Norwegian Central Bank cut its
key rate by 50bp to 4.75%.
US durable orders posted a 0.8% gain in Sep thanks to a bounce in civilian aircraft orders,
a partial recovery in autos and a near 20% jump in defence. But the ex
transport and ex defence numbers show that over the latest two months the
orders picture has actually been very weak, consistent with the sliding orders
picture painted by the business surveys. Notably, core capital goods orders
deteriorated significantly in August and September, adding weight to the view
that either business investment spending or exports (or both) will be weaker in
Q3 and Q4. Inventory accumulation seems to have lost some momentum late in Q3
German inflation fell from 2.9% yr
to 2.4% yr in Oct, pulled lower
by heating oil and transport prices. Barring an unexpected renewed spike in
energy prices and substantial further weakness in the euro, German inflation
should be back below 2% by the end of this year, as base effects in November
and December are very favourable.
UK credit data remain soft. The UK mortgage market appeared to stabilise at very
weak levels in Sep. The number of new loans issued has levelled off at around
72% below the early 2007 peak for three months now, and after an historic but
modest reduction in mortgages outstanding in August (when repayments were
greater than the value of new loans issued - something we have never seen in
the modern era), lending once again rose modestly in September. Still very weak
numbers - but not getting weaker. Consumer credit growth, on the other hand,
collapsed to a fifteen year low last month, yet another reason to be very
suspicious of official retail sales figures which held up better than expected
in the third quarter.
The world economy is
slowing rapidly and New Zealand is exposed on three fronts - tighter credit,
weaker demand and lower commodity prices. A softer currency will be needed for
an extended period to soften the blow. The USD remains in favour through this
crisis, more by default than by merit.
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