Stocks on Wall Street plummeted to a 15-month low overnight as Fed Chair Jerome Powell failed to soothe the jittery markets. The risk off mood continued into Asia and European bourses are pointing to heavy losses on the open. Stocks are experiencing the worst reaction to a Fed policy announcement since 1994.
As expected, the Fed raised rates for a fourth time this year and also softened its outlook for 2019, with just two hikes now planned. The Fed gave an upbeat assessment of the economy whilst lowering GDP expectations to 3.2% and inflation forecasts. However, the tweaks to the policy statement weren’t dovish enough for the market.
Going into the announcement traders were braced for a much more dovish Fed, given the mounting concerns over the health of the global economy. Questions were being raised as to whether the Fed could even hike given the growing risks. Whilst the Fed’s subtle tweaks to the statement, GDP and inflation outlook cast acknowledgment to the market’s concerns, the changes were by no means significant. The recent market chaos and tightening of financial conditions has not fundamentally altered the Fed’s outlook.
Despite the Fed hanging onto its positive outlook, we do know that the Fed will only go forth and hike if data coming out of the US improves.
BoE Up Next
The pound has picked up from its lows overnight and is trading higher versus the dollar ahead of the Bank of England monetary policy announcement at 12pm GMT today.
The BoE is not expected to hike rates. Whilst wage growth is a solid 3.3% and inflation above the target 2%, Brexit uncertainty will mean another wait and see BoE meeting. Since the last BoE MPC meeting 7 weeks ago, Brexit uncertainty has ratcheted up further. Theresa May’s deal has faced criticism from all sides, the chances of crashing out without a deal have increased and the option of a second referendum is gaining in popularity.
There is no doubt that the uncertainty of how Brexit will play out is keeping the BoE on hold. This Brexit uncertainty will continue until mid-January at the earliest, making the BoE's ability to do anything in February when the inflation report is due for release questionable at best.
With the BoE expected to sit on the side-lines waiting for clarity, the currency markets may have difficulty remaining optimistic. The pound could find itself back below $1.26 despite the weaker dollar.
Opening calls
FTSE to open 116 points lower at 6649
DAX to open 158 points higher at 10608
CAC to open 79 points higher at 4698