Judging by the Fed’s brilliance, Japan/China owns Reuters

A look at the day ahead in US and global markets from Mike Dolan

After a strong day on Thursday in which Wall Street stocks turned on deep Federal Reserve easing in a still-healthy economy, today there is a modest step back and an eye on other central banks choosing to sit for now.

Going in different directions from each other politically, the central banks of Japan and China are choosing to keep interest rates on hold on Friday – the latter slightly surprising given its economy’s alarming deceleration.

The People’s Bank of China unexpectedly left lending rates unchanged at monthly fixes, confounding forecasts after the Fed cut by 50 basis points on Wednesday. Almost 70% of market participants surveyed earlier in the week saw a discount.

Whether this is just a delay to sync with wider stimulus plans later is a moot point, but – perhaps unnecessarily for China – it lifted the level to a new 16-month high.

Less surprisingly, the Bank of Japan left policy settings unchanged on Friday as well – holding off on further tightening for now, even as it upgraded its economic assessment and core consumer inflation rose to 2.8% in August, as it was to be expected.

With BOJ officials seemingly in no rush to further “normalize” ultra-low rates, the yen fell back to near 144 to the dollar.

In Europe on Thursday, the Bank of England – with an eye on the new Labor government’s first budget next month – also held back from making its second interest rate cut of the year. And that lifted sterling to its best levels since March 2022.

The UK context for both the BoE decision and the budget was mixed – with consumer confidence falling to a six-month low, even as August retail sales growth beat forecasts. The fiscal picture darkened, however, with news of higher-than-expected public borrowing last month and government debt at 100 percent of GDP for the first time since comparable records began 31 years ago.

Back on Wall Street, it was still very much a case of “what’s not to like?” for investors.

The Big Fed cut alongside news that the weekly jobless drop puts the “soft landing” on track, and all stock indexes rose on Thursday – with new record highs for and the flat version of the index adjusting for several megacap leaders. .

Both the tech-heavy and small-cap Nasdaq hit their best levels since July.

The S&P500 and Nasdaq are now up 20% for the year to date. The volatility indicator fell below 17 and below long-term averages.

Fed futures, which are pricing in slightly more for the rest of this year than the extra 50bp indicated by the central bank, now see 200bp of cuts over the next 12 months to settle at 2.9% – where the Fed has indicated the long term. the “neutral” rate is now.

US Treasuries appear to be comfortable with this – with 2-year Treasury yields nearing 2-year lows below 3.6% and the newly positive 2-10-year yield curve spread of over 10 bps for the first given in more than two years.

As for whether the Fed is easing too much, inflation expectations have risen a bit but remain just above the Fed’s 2% target. prices rose this week, not least because of renewed tensions in the Middle East, but annual oil price losses exceeded 20% for two weeks.

With attention on other central banks, it strengthened slightly from the lows of the year.

Stock futures were off new highs before the bell on Friday.

The focus is now likely to turn to a series of Fed officials on the stump next week – and that could shed further light on how to cut this week’s big rate.

The end of the quarter is also here and of course the November election campaign is starting to heat up.

The latest poll shows the two presidential candidates roughly tied nationally, though Democrat Kamala Harris remains the slight favorite in the betting markets.

Key developments that should provide more direction for US markets later Friday:

* Euro zone consumer confidence September; Canada August manufacturer prices

* Philadelphia Federal Reserve President Patrick Harker speaks; European Central Bank President Christine Lagarde and International Monetary Fund Managing Director Kristalina Georgieva speak in Washington; Bank of Canada Governor Tiff Macklem speaks; Bank of England policymaker Catherine Mann and BoE chief executive David Bailey speak

(By Mike Dolan; Editing by Kevin Liffey; [email protected])