Aurelia Butler

LONDON (Reuters) – The U.S. Federal Reserve has joined a global easing cycle with a larger-than-anticipated half-point interest rate reduction.Seven of the 10 big developed-market central banks tracked by Reuters have now started easing policy. Japan is the outlier, as it starts to lift its rates from ultra-low levels.Here’s where major rate-setters stand and what traders expect next.1/ SWITZERLAND The Swiss National Bank, the first among Western peers to lower borrowing costs in March, cut rates again in June to 1.25%. It has signaled it intends to keep going.Money markets view another cut on Sept. 26 as certain, and are pricing almost 30% odds of a 50 basis point (bps) reduction, after Swiss annual inflation dropped to 1.1% in August. Outgoing SNB chair Thomas Jordan believes a stronger franc threatens exports.2/ CANADA The Bank of Canada is expected to deliver a fourth consecutive cut in October. A 25 bps reduction is fully priced in and markets attach a roughly 60% chance of a bigger 50 bps cut.Annual inflation has slowed to 2% and the BoC has mused about price rises dropping below this target level after the economy slackened and strong population growth helped lift unemployment to 6.6%. 3/ SWEDEN Sweden’s Riksbank, which started cutting rates in May after its successive hikes crushed inflation but weakened the economy, is tipped to lower borrowing costs by another 25 bps on Sept. 25.Swedish rates stand at 3.5% but annual inflation has steadied at below the Riksbank’s 2% target.4/ EURO ZONE The ECB cut rates again on Sept. 12 as the euro zone economy faltered and inflation slowed, providing scant clues on what it might do next.Investors expect roughly 40 bps of further easing by year-end and see about a 30% chance of another 25 bps cut in October.5/ BRITAIN The Bank of England left its key rate unchanged at 5% on Thursday after cutting it in August from a 16-year high of 5.25%.Britain’s services inflation remains sticky, meaning the BoE is expected to lower rates far more slowly than in the United States or the euro zone.Markets price in roughly 40 bps of rate cuts by year-end and see around a 65% chance of a quarter-point cut in November.6/ UNITED STATES The Federal Reserve on Wednesday kicked off an easing cycle with a big 50 bps rate cut, the first reduction in over four years.Money markets now price in roughly 70 bps worth of further easing by year-end, suggesting traders think another big reduction is likely. 7/ NEW ZEALANDA convention for quarterly instead of monthly GDP and inflation data has baffled New Zealand’s central bank and domestic market watchers. The Reserve Bank of New Zealand in August cut rates for the first time this cycle to 5.25%, a year earlier than its own projections had stated. Markets forecast another quarter point drop in October.8/ NORWAYNorway’s central bank remains in the hawkish camp.It left its policy rate unchanged at 4.50% on Thursday and said any cuts must wait until the first quarter of 2025, boosting the crown currency.Markets price in a roughly 70% chance of a move in December, meaning Norway’s easing cycle will likely start well after those of its peers.9/ AUSTRALIA Another in the hawkish camp is Australia.The Reserve Bank of Australia has held rates at 4.35% since last November and believes inflation is still sticky, although data suggests the economy is struggling.Markets do not expect any cuts until at least December. 10/ JAPANRising inflation prompted longtime outlier the Bank of Japan to nudge borrowing costs up to 0.25% in July, a move that wreaked havoc on global trades that were underpinned by its ultra-loose monetary policies. The yen has surged, Japanese stocks are flailing and the BoJ, now keen to protect domestic industry from further market ructions, is expected to hold rates steady on Friday and keep them below 0.5% until at least October 2025. More

This is an on-site version of the US Election Countdown newsletter. You can read the previous edition here. Sign up for free here to get it on Tuesdays and Thursdays. Email us at [email protected] morning and happy Thursday! Today let’s dive into:Democrats’ growing confidence in North CarolinaA major union declining to endorsePolitical implications of the Federal Reserve’s rate cutAt one point in the White House race, North Carolina seemed like the swing state that posed the toughest challenge for the Democrats, but the party is growing more confident that it’s in play for Kamala Harris.Donald Trump is still up by 1.4 percentage points in the state, according to the FT’s poll tracker, but when I was in Charlotte last week, local Democratic politicians and operatives told me that Harris’s presence at the top of the ticket has reinvigorated support for the party in North Carolina. The state last went blue in 2008, when Barack Obama was first elected president.To flip the state, Democrats need to heed lessons learnt in the 2022 midterms, especially in the party stronghold of Mecklenburg County, which encompasses Charlotte, North Carolina’s most populous city.Mecklenburg is the party’s best opportunity to shore up votes since it’s the county with the most Democrats, but it has had low turnout in recent years. “It’s simply untenable if Democrats want to have a real shot at winning the state,” said Drew Kromer, the 27-year-old chair of the Mecklenburg County Democratic Party. Particular attention needs to be paid to Black voters, who make up 55 per cent of registered Democrats in the county, he added.He said the party “wasn’t particularly active” in the county two years ago, but over the past 16 months Democrats have “built a much more robust party infrastructure”.“If Mecklenburg can fix its turnout problem, we will become North Carolina’s Fulton County,” Kromer said, referring to the Georgia county incorporating Atlanta, which was pivotal in Biden’s 2020 win.“It’ll be close, whatever [the result] is, but I think that we’re going to be able to do it,” said state representative Mary Belk, whose district is in Mecklenburg County. “We understand that we’ve got to reach out and talk to [voters] that we haven’t been talking to,” she added, including young people in the fintech sector who are moving to the state. The most important thing for the party to do in deeply divided North Carolina is make sure people get the message that their vote matters, said state senator Natasha Marcus, who also represents Mecklenburg County. That includes ensuring they are prepared for the first presidential election in which they must present a valid form of identification to vote in North Carolina.Campaign clips: the latest election headlinesBehind the scenesThe International Brotherhood of Teamsters, an influential US union, said it would not endorse a presidential candidate, a sign that a core part of the Democrat’s voting bloc might be drifting to the right.The decision not to endorse came after a phone poll of union members — who are heavily concentrated in the swing states of Pennsylvania, Michigan and Wisconsin — showed that 58 per cent wanted the Teamsters to endorse Trump, with 31 per cent preferring Harris. The move was basically a “tacit endorsement” of Trump, union board member John Palmer told the FT’s Taylor Rogers.Referencing Trump’s history of animosity with unions, Palmer said:It was a cowardly political move by people who wanted to pander to the membership instead of taking up what would have been a hit by telling the truth.Harris has won the endorsement of other big unions, but the Teamsters’ decision comes as Democrats and some labour leaders fear that Trump has made inroads with working-class voters.This is the first time in almost 30 years that the union hasn’t endorsed a candidate, and it last backed a Republican in 1988. “Unfortunately, neither major candidate was able to make serious commitments to our union to ensure the interests of working people are always put before Big Business,” union president Sean O’Brien said in a statement.DatapointThe Federal Reserve opted for a chunky half-point rate cut yesterday, and signalled that borrowing costs will fall further this year [free to read].The decision could provide a boost for Harris, who has been campaigning on bringing down everyday costs, a top voter concern. Some content could not load. Check your internet connection or browser settings.Trump — who has been critical of Fed chair Jay Powell — said the Fed’s move showed the US economy was either “very bad” or that it was “playing politics”. “I guess it shows the economy is very bad to cut it by that much, assuming that they are not just playing politics,” he said on Wednesday. “The economy would be very bad, or they are playing politics, one or the other. But it was a big cut.”It was a milestone for the central bank, marking the first time it has cut rates in more than four years.The federal funds rate is now between 4.75 per cent and 5 per cent, and officials’ latest dot plot — in which they sketch out their rate forecasts — showed they expect that to fall to 4.25 per cent to 4.5 per cent by the end of the year.Policymakers are expecting rates to drop by another percentage point next year, and fall just below 3 per cent by the end of 2026.Some content could not load. 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(Reuters) – Traders on Thursday added to bets the U.S. Federal Reserve’s next rate cut will be smaller than the one it delivered on Wednesday, after economic data showed an unexpected drop in unemployment insurance claims.Interest-rate futures contracts now price in about a 30% chance that the Fed, which cut rates by half a percentage point on Wednesday, will deliver a second cut of the same size in November. The market-based probability of a quarter-point rate cut in November is now about 70%, up from around 65% before the data. More

(Reuters) -BofA Global Research was the only major brokerage to raise its forecast for the Federal Reserve’s anticipated interest-rate cuts for the rest of 2024, a day after the U.S. central bank delivered an outsized cut. The Wall Street brokerage said it expects a 75-basis point reduction in the fourth quarter, compared with its earlier forecast for two 25-bp cuts in the Fed’s November and December meetings. Fed policymakers themselves have projected the benchmark interest rate will fall by another half a percentage point by 2024-end. The central bank announced a larger-than-usual 50 bps reduction on Wednesday that Chair Jerome Powell said was meant to show policymakers’ commitment to sustaining a low unemployment rate now that inflation has eased.Following the bigger rate cut, “we are skeptical that the Fed will want to deliver a hawkish surprise”, BofA economists said.The brokerage expects another 125 bps of cuts in 2025 to bring the terminal rate to 2.75%-3.00%, from the current federal funds target rate of 4.75%-5.00%. That compares with Fed policymakers projecting a full percentage point cut for next year, and half a percentage point in 2026, while cautioning the outlook that far into the future is necessarily uncertain. Goldman Sachs, meanwhile, retained its forecast of two 25- bp cuts in the November and December meetings this year, but said it now expects consecutive 25 bps cuts from November 2024 through June 2025, bringing the terminal rate to 3.25%-3.50% by mid-2025.It earlier expected quarterly pacing of cuts in 2025. Citigroup maintained its expected size of cuts this year at 125 bps, but now expects a 25 bps reduction in December against its earlier forecast of a 50 bps cut. Other brokerages like Macquarie and Deutsche Bank have retained their calls of two 25 bps rate cuts this year. More

LONDON (Reuters) – European banks may not be sufficiently provisioned for property loan defaults if severe pressure leads to rapid growth in problem loans, a report by Moody’s (NYSE:MCO) Ratings said on Thursday, but judged lenders likely had strong enough capital buffers to cope.Property owners across the region have been squeezed by slumping prices and higher borrowing costs, raising the risk their bank borrowings will go unpaid, although central bank interest rate cuts have started to provide some relief.Moody’s modelled for a significant deterioration in the quality of 21 highly-exposed European banks’ commercial real estate loans, with a scenario based on the stress that hit banks in the wake of the 2008 global financial crisis.The banks included were those with the highest exposure to commercial real estate relative to their capital strength. More than half of the lenders were German, most of them real estate specialists, with the remainder from countries including Sweden, Austria and Denmark. Moody’s applied a loan loss reserve level of 40%, the average reported by large European banks over the last five years. But it noted the actual average in the first quarter this year was lower at 33.5%, reflecting growth in problem loans had risen faster than provisioning.”While a shift toward better quality assets might justify lower coverage, we see an increased risk that banks are insufficiently provisioned,” Moody’s said in its report.The comment echoed a warning from the European Central Bank last month, which found that euro zone banks had been too optimistic in valuing commercial property, potentially masking a deterioration of loans.The potential strain would be greatest for banks with high exposure to U.S. and British offices and mildest for those lending to housing projects, Moody’s found, but added that all the lenders surveyed would remain above their minimum capital thresholds.”Our tests necessarily include simplifying assumptions, but they suggest there would be no breaches of minimum regulatory capital levels under the modeled scenarios,” Moody’s said. More

ORLANDO, Florida (Reuters) -Beyond the immediate headlines generated by the Fed’s 50 basis point interest rate cut, it is policymakers’ revised outlook for the fed funds rate’s eventual destination, and how soon it takes to get there, that matters more.Broadly speaking, the Fed indicated on Wednesday it will emerge from its restrictive policy stance a little sooner than previously indicated, and the eventual ‘neutral’ level of policy will be slightly higher.The Fed is essentially signaling a slightly faster and shallower easing cycle. The first part of that may point to alarm over the labor market or economy, but the second part suggests officials have increasing confidence in the economy’s resilience.Officials are hoping that bolder, quicker action from a position of relative strength will best protect the labor market and growth, which will hopefully steer the economy away from recession. In short, the Fed thinks the ‘soft landing’ is still in sight.This may explain why bond yields rose and stocks eventually fell on Wednesday, as some of the more optimistic hopes for lower rates over the longer term evaporated.HIGHLY RESTRICTIVE The Fed lowered its fed funds target range to 4.75-5.00%, the midpoint being 4.875%. It also raised its median projection for the longer run fed funds rate to 2.9% from 2.8% in June. That’s a small change, but 2.9% is the highest since 2018 and significantly up from 2.5% in December where it had been virtually unchanged for years. What’s more, the median Fed official’s estimate has the policy rate down at 2.9% in just over two years, by the end of 2026. Recent Staff Economic Projections indicated the longer run fed funds rate, or neutral rate, would not be reached for at least three years. Implicitly, the Fed had previously been admitting that policy would remain in restrictive territory – that is, above ‘neutral’ – for a considerable length of time. That was the essence of the ‘higher for longer’ view on interest rates.Now though, the higher projected ‘terminal’ rate in theory reduces the amount of policy restriction that has to be removed before policy becomes stimulative. Most analysts agree policy has been highly restrictive for some time. In a research note published earlier this month Fed economists estimated the real rate of interest in March was about 1.15 percentage points above the natural rate, “at about the same level that prevailed before the 2001 and 2008 recessions.”The real fed funds rate adjusted for annual consumer inflation is the highest in 17 years. Strategists at JP Morgan, meanwhile, noted this week that when set against estimates of ‘R-Star’, policy was more restrictive than at any time in the past 30 years in real terms. R-STAR, FLOATING IN THE SKY’R-Star’ is the real rate of interest that neither stimulates nor crimps economic activity when the economy is at full employment. Assuming the Fed’s 2% inflation goal is reached, and bearing in mind the Fed’s new long-run policy rate forecast of 2.9%, Fed officials see R-Star at around 0.9%.R-Star is often dismissed or derided because it is a theoretical, unknowable number that is always changing. But as New York Fed President John Williams noted in July, it is either explicitly or implicitly “at the core of any macroeconomic model or framework one can imagine.”Investors can’t ignore it.Taking into account the new fed funds midpoint rate of 4.875% and policymakers’ new long-term forecast of 2.9%, it can reasonably be inferred that Fed policy is now restrictive by around 200 basis points. Put another way, the fed funds rate won’t be considered neutral until it is reduced by another 200 basis points or so, which the Fed signaled it intends to do by the end of 2026.That’s not set in stone, and Chair Jerome Powell stressed that upcoming Fed decisions will be data-dependent and on a meeting-by-meeting basis. Investors will make up their own minds, of course, but the Fed on Wednesday signaled it won’t fall behind the curve and remains confident in a soft landing.(The opinions expressed here are those of the author, a columnist for Reuters.)(By Jamie McGeever; Editing by Lincoln Feast.) More