Fed cuts rates again to sustain US GDP growth

KUWAIT: The Federal Reserve cut interest rates by 0.25 percent for the third time this year to help sustain US growth. The cut was widely expected as market participants remain concerned about a slowdown in the economy while the trade war between the United States and China continues. Despite cutting rates, the Fed was relatively optimistic mentioning an extensive list of reasons the economy is doing well under the current stance of monetary policy including robust consumer spending and strengthening home sales.

The Fed decision and statement now allude to a potential pause in their “mid cycle adjustment” rate cuts implemented this year. The key change in the statement was the removal of the promise to “act as appropriate to sustain the expansion”. Now the FOMC will merely monitor developments as it “assesses the appropriate path” for the fed funds rate. Fed governor Jerome Powell stated that risks to their “primary outlook” were “now moving in a positive direction,” and that it would “require incoming data to cause a material reassessment of the Committee’s primary outlook.” In other words, economic data would have to deteriorate notably to cut further or inflation would have to pick up considerably to hike again. Neither looks likely over the short-term, so it is more likely that the Fed is done with policy changes for the time being.

The dollar fell to a 10-day low against its major counterparts after the FOMC meeting as cuts in US rates promote the attractiveness of foreign currencies. Also, as the dollar remains near historically high levels, any improvement in global data is likely to weigh on the dollar as investors bet on improving growth in Europe and other regions. Indeed, after no-deal Brexit risks diminished and positive data came out of Europe, we saw the pound sterling and euro both rebound considerably against the U.S. dollar this month.

GDP better than expected

US economic growth slowed less than expected in the third quarter as a further contraction in business investment was offset by resilient consumer spending, further reducing market fears of a recession. GDP increased at a 1.9 percent annualized rate in the third quarter down from 2.0 percent pace in the April-June period. Businesses maintained a steady pace of inventory accumulation, exports rose and the housing market rebounded after contracting for six straight quarters, the government said in its estimate of GDP. Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, slowed to a still-healthy 2.9 percent rate last quarter after surging at a 4.6 percent pace in the second quarter.

Non-farm payrolls

Non-farm payrolls rose by 128,000 in October overcoming an autoworkers’ strike and beating expectations. Notable job gains occurred in food services, social assistance, and financial activities. The unemployment rate ticked higher to 3.6 percent, in line with estimates, but remains around the lowest in 50 years. The pace of average hourly earnings picked up a bit, rising 0.1 percent to a year-over-year 3 percent gain in line with expectations.

Trade negotiations

US President Donald Trump said the United States and China would soon announce a new site where he and Chinese President Xi Jinping will sign a “Phase One” trade deal after Chile canceled a planned summit set for midNovember. “China and the USA are working on selecting a new site for signing of Phase One of Trade Agreement,” Trump said on Twitter. Chile’s decision to cancel the Nov. 16-17 Asia-Pacific Economic Cooperation summit in Chile ruined plans for Trump and Xi to sign a deal on the sidelines. Trump offered no specifics on when a new meeting might be set but the White House said it expected to finalize a deal “within the same time frame.”

The 27 EU member states approved an extension to the Brexit deadline to the end of January but also gave the UK the possibility to leave the bloc sooner if its withdrawal agreement has been ratified. UK Prime Minister Boris Johnson, who opposed the delay, urged the EU member states to not allow any further extensions beyond January 2020.

In a “gamble” attempt to defeat the stalemate in parliament and gain majority, Johnson pushed for, and was approved, a general election on December 12. While Johnson’s party is seemingly leading in the polls, the decision could go either way leading to further delays. Former PM Theresa May went into her 2017 snap election in an even stronger position but ended up losing seats and her majority in parliament. Still, Johnson has concluded it would be better to hold an election now, rather than try to force his Brexit deal through parliament in the face of strong opposition.

Eurozone GDP & inflation

Euro zone economic growth in the third quarter defied market expectations of a slowdown and was steady quarter-onquarter, preliminary data showed, while headline inflation slowed because of a sharp fall in energy prices. The European Union’s statistics office Eurostat estimated GDP grew 0.2 percent in the JulySeptember period against the previous three months, the same as in the second quarter. Expectations were for a 0.1 percent increase only.

Bank of Japan

The Bank of Japan held their shortterm interest rate target at -0.10 percent with a 10-year Japanese Government Bond yield target around zero as widely expected. However, the Japanese central bank offered more clarity on its forward guidance for keeping rates low. Prior it was to spring 2020, which was deemed as too short. Now the commitment is simply for “as long as necessary.” The more important change was to make reference to rates being at “their present levels or lower” for both short-term and long-term rates which is another change that opens up the prospect of another cut in the deposit rate from the current -0.10 percent. However, the BOJ will likely follow the US Fed’s approach and wait for further noticeable deterioration in the economy before acting.

Oil lower, gold higher

A Reuter’s survey showed that oil prices are likely to be pressured this year and next as low demand from a slowing global economy and a surge in US shale output offset support from OPEC production cuts and Middle East supply risks. The poll of 51 economists and analysts forecast Brent crude would average $64.16 a barrel in 2019 and $62.38 next year. Oil prices fell around 3.6 percent last week down to 59.8 as investors worried about progress in US-China trade talks. Gold rose last week as the dollar came under pressure after the US Federal Reserve cut interest rates while uncertainty surrounding a US-China trade deal bolstered the metal’s appeal as a safe-haven investment. Gold is highly sensitive to any reduction in interest rates, which decreases the opportunity cost of holding nonyielding bullion. Gold rose 1.30 percent to $1513.55 last week.

Kuwait

Kuwaiti dinar at 0.30325

The USDKWD opened at 0.30325 yesterday morning.