Economy

SINGAPORE (Reuters) – The U.S. dollar rose broadly on Thursday, recovering from an earlier tumble in the immediate aftermath of the Federal Reserve’s outsized interest rate cut that had been largely priced in by markets.The U.S. central bank on Wednesday kicked off its monetary easing cycle with a larger-than-usual half-percentage-point reduction that Chair Jerome Powell said was meant to show policymakers’ commitment to sustaining a low unemployment rate now that inflation has eased.While the size of the move had been anticipated by investors in part due to a slew of media reports pointing in that direction ahead of the decision, it defied the expectations of economists polled by Reuters, who were leaning toward a 25-basis-point cut.Still, markets reacted in a typical “buy the rumour, sell the fact” fashion that kept the dollar on the front foot in early Asian trade. It rebounded from a more than one-year low against a basket of currencies in the previous session and was last marginally higher at 101.03.Against the yen, the greenback gained 0.58% to 143.12. The euro fell 0.04% to $1.1113, away from a three-week high hit in the previous session.”Obviously, (there was) a lot of volatility on the announcement, but in terms of the pricing action and the information that came out … it’s not really that controversial in a sense,” said Rodrigo Catril, senior FX strategist at National Australia Bank (OTC:NABZY) (NAB).”It’s sort of been pretty close to what the market has been pricing, particularly in terms of expectations of – arguably a little bit more than a 100 – but 100 bps of rate cuts this time around and another 100 next year, and also a terminal rate that is below 3% as well. So the big picture … is not materially different.”Fed policymakers on Wednesday projected the benchmark interest rate would fall by another half of a percentage point by the end of this year, a full percentage point next year and half of a percentage point in 2026, though they said the outlook that far into the future is necessarily uncertain.”Our view is that the dollar will depreciate next year. That is a cyclical story, not a structural story,” said Eric Robertsen, Standard Chartered (OTC:SCBFF)’s global head of research and chief strategist at a media roundtable in Singapore on Wednesday.”We think the dollar is going to weaken because the Fed is easing interest rates and the global economy will experience a soft landing, which tends to be a benign scenario that tends to be negative for the dollar.”Sterling fell 0.11% to $1.3199 after scaling a peak of $1.3298 in the previous session, its strongest level since March 2022.That came in the wake of data on Wednesday which showed British inflation held steady in August but sped up in the services sector closely watched by the Bank of England, reinforcing bets that the central bank will keep interest rates on hold later in the day.”When it comes to the Bank of England, clearly those inflation numbers yesterday show that they still have a concern or a problem with inflation, and in particular services inflation is still too high for comfort,” said NAB’s Catril.”So to expect an easing today because of what the Fed has done seems a little bit too hard to believe.”Elsewhere, the Australian dollar edged up 0.05% against its U.S. counterpart to $0.6768, while the New Zealand dollar advanced 0.04% to $0.6210.Data out on Thursday showed New Zealand’s economy contracted in the second quarter as activity fell in a number of industries, though the figures came in better than forecasts. More

WELLINGTON (Reuters) – New Zealand’s economy contracted in the second quarter as activity fell in a number of major industries, keeping the central bank on track for more rate cuts this year.Official data out on Thursday showed gross domestic product fell 0.2% in the June quarter from the prior quarter, better than analysts’ forecasts of a 0.4% contraction. It followed a 0.1% rise in the first quarter, which was revised down from a previous estimation of 0.2% growth. Annual GDP decreased 0.5%, Statistics New Zealand data showed, which was in line with market expectations.The New Zealand dollar was almost unchanged at $0.6213 after the data, which were seen as too dated to affect the outlook for rates. Markets are fully priced for another quarter-point cut in October, with a 28% chance of 50 basis points. Swaps have 84 basis points of easing priced in by the end of the year.”The data today highlight that the economy was indeed in a weak patch in the second-quarter, with widespread evidence that private demand is soft and that this is flowing through to multiple sectors of the economy,” ASB Bank senior economist Kim Mundy said in a note.The data showed activity fell in nine of 16 industries with the retail trade and accommodation, agriculture, forestry, and fishing and wholesale trade sectors all weaker. The manufacturing industry saw the biggest improvement. Mundy said the data did not significantly alter the picture for the Reserve Bank of New Zealand and ASB Bank continued to expect the central bank would cut by another 50 basis points by the end of the year. The central bank lowered the official cash rate for the first time in more than four years at its last meeting in August, and RBNZ Governor Adrian Orr said he would like to deliver two more cuts by Christmas. This is in line with other major central banks that have begun to cut cash rates. The U.S. central bank on Wednesday kicked off an anticipated series of interest rate cuts with a larger-than-usual half-percentage-point reduction. The European Central Bank and Bank of Canada have also reduced rates.Westpac senior economist Michael Gordon said financial markets will no doubt fixate on the idea that the Federal Reserve’s decision has opened the door for 50 basis point rate cuts elsewhere, including in New Zealand.But “there isn’t much in the local data that argues for the RBNZ to step up the pace of easing beyond what it had already signalled in its August policy statement,” he said. More

The Fed cut its policy rate by 50 bps to a range of 4.75% to 5%, and signaled that more cuts were likely on tap. The central bank signaled that risks around its outlook for bringing down inflation and a cooling labor market were now roughly balanced. Fed Chair Jerome Powell said the central bank was growing increasingly confident that inflation will ease further in the coming months.Citi said that Wednesday’s cut completed the Fed’s pivot towards addressing labor market weakness from curbing further inflation risks. The brokerage said that weak monthly employment reports before the Fed’s November meeting will see the central bank cut rates by 50 bps again- which was its base case. The Fed is then expected to close out the year with a 25 bps cut, bringing its total 2024 reductions to 125 bps. “Powell noted a number of times that today’s 50bp cut is a “commitment” to not get behind the curve which suggests the bar for further large rate reductions is very low. We continue to see risks as balanced toward a more rapid softening of labor market data and a more aggressive pace of rate cuts,” Citi analysts wrote in a Wednesday note. Citi described Powell as sounding “particularly cautious” on the trend of payrolls growth, stating that any further signs of weakness in the labor market were likely to draw out more dovish moves from the Fed. Still, Powell warned that the Fed was unlikely to go back to an era of ultra-low rates, and that he saw a much higher neutral rate for the Fed than previous instances. More

BRASILIA (Reuters) – Brazil’s central bank kicked off an interest rate-hiking cycle on Wednesday with a 25 basis-point increase, as expected, and signaled more increases ahead to tackle a challenging inflation outlook driven by stronger-than-expected economic activity.The bank’s rate-setting committee, known as Copom, voted unanimously to raise the benchmark Selic interest rate for the first time in over two years to 10.75%, in line with most forecasts.While the U.S. Federal Reserve initiated its highly anticipated easing cycle earlier in the day, Brazil’s central bank began moving in the other direction and left the door open to larger increases.”The pace of future adjustments of the interest rate and the total magnitude of the cycle that just started will be determined by the firm commitment of reaching the inflation target and will depend on the inflation dynamics,” Copom wrote in its policy statement.Policymakers said the balance of inflation risks is now tilted to the upside, flagging a stronger-than-expected labor market and robust growth.”The scenario, marked by resilient economic activity, labor market pressures, positive output gap, an increase in the inflation projections, and unanchored expectations, requires a more contractionary monetary policy,” they wrote.Gustavo Sung, chief economist at Suno Research, said he expected two more rate hikes of the same size in November and December, bringing the benchmark rate to 11.25% at year-end.The central bank had held its policy rate steady at 10.50% in June and July after a series of cuts since last year to bring it down from a six-year high of 13.75%. Expectations for a rate hike, the bank’s first since August 2022, firmed after second-quarter activity significantly exceeded forecasts, driven by a robust labor market and rising wages in Latin America’s largest economy.However, bets on tighter policy had been building since late July, when central bank minutes indicated that policymakers would not hesitate to raise borrowing costs if needed amid growing upside risks for inflation.Since then, the central bank’s communication has turned more hawkish, including prominent messaging from monetary policy director Gabriel Galipolo, who was confirmed as President Luiz Inacio Lula da Silva’s nominee to lead the central bank after Campos Neto’s term expires in December.Galipolo has shown discomfort with the bank’s inflation models showing consumer prices surpassing the annual 3% target and indicated a rate hike was on the table.Brazil’s 12-month inflation reached 4.24% in August.The central bank raised its baseline inflation forecasts to 4.3% for this year and 3.7% for 2025, up from 4.2% and 3.6% previously.For the first quarter of 2026, considered the relevant horizon for monetary policy, the projection was 3.5%, up from the previous 3.4%.In all three cases, estimates are above the 3% target, which has a tolerance margin of 1.5 percentage points on either side.(This story has been corrected to show that the last interest rate hike was in August 2022, not June 2022, in paragraph 6) More

(Reuters) – The Bank of England looks set to keep interest rates on hold on Thursday as it awaits signs that inflation risks are quashed, putting the focus instead on a decision about bond sales that could feed into Finance Minister Rachel Reeves’ first budget.British inflation held steady in August but sped up in the services sector, which is key for the BoE, showing why forecasters expect interest rates to fall more slowly than in the United States and the euro zone.The Federal Reserve went on Wednesday for an unusually large half-percentage-point reduction, a move that reflected “growing confidence” about the outlook for inflation, according to Chair Jerome Powell.The BoE’s Monetary Policy Committee is likely to strike a far more cautious tone on Thursday.All 65 economists in a Reuters poll published last week said it was likely to hold rates at 5.0%, after cutting them in August from a 16-year high of 5.25%.Financial markets pointed to a roughly 1-in-4 chance of a cut after Wednesday’s inflation data, compared with 1-in-3 the day before.News on price pressures has been mixed. Wage growth – another key metric for MPC members – cooled as they had expected last month and the economy stagnated in July.But the Decision Maker Panel – a business survey favoured by the MPC – showed a downward trend in wage growth expectations has halted. Furthermore, services inflation crept up in August, albeit in large part due to volatile air fares.Tim Graf, head of macro strategy at State Street (NYSE:STT) Global Markets, said the inflation data “solidifies the belief, largely priced by markets, that the Bank of England will stand pat at (the) policy meeting”.The consensus of economists polled by Reuters pointed to a 7-2 split in favour of holding rates. Last month, the MPC voted 5-4 to cut, but said some of the five saw the decision as finely balanced.QT CRUNCH TIMEBond investors are watching for Thursday’s annual decision on the pace of the BoE’s quantitative tightening programme – the sale of hundreds of billions of pounds of British government bond purchased under past attempts to stimulate the economy.In September 2023, the MPC voted to run down the BoE’s stock of gilts by 100 billion pounds ($130 billion) via active sales and bonds maturing, up from 80 billion in the previous 12 months. Some lawmakers have criticised the QT programme because it crystallises losses sustained by the BoE, which purchased gilts in past years at much higher prices than their current sale value. Those losses are paid for by already-stretched taxpayers.But the BoE could announce a QT acceleration on Thursday. Around 87 billion pounds of its gilts are due to mature over the next year, leaving just 13 billion pounds for active sales.Citi and JPMorgan expect the BoE to expand the programme to 120 billion pounds so it can keep up the volume of active gilt sales.Francis Diamond, head of UK, euro and global inflation strategy at JPMorgan, said in a research note that market reaction to such a move would be limited.Governor Andrew Bailey has said QT is needed to restore BoE firepower if it has to stimulate the economy with bond purchases again.Given its impact on the state’s budget, Finance Minister Reeves will be watching Thursday’s decision. When pressed by lawmakers, she said QT was an operational matter for the BoE.But many economists think Reeves will change the government’s fiscal rules to exclude the impact of the BoE’s QT programme. That could give her several billion pounds of extra fiscal space in her inaugural budget, due on Oct. 30, when she is under pressure to increase public spending.The New Economics Foundation think tank said maintaining the BoE’s bond sales at the current pace would cost taxpayers just under 24 billion pounds per year until 2028/29. It said 13.5 billion pounds could be saved annually by ceasing active sales. “The Bank of England should reflect on the value for money from such choices and the chancellor should reconcile the fact that her fiscal rules are imposing arbitrary constraints on her spending decisions,” said NEF economist Dominic Caddick.($1 = 0.7648 pounds) More

Hong Kong’s monetary policy moves in lock-step with the United States as the city’s currency is pegged to the greenback in a tight range of 7.75-7.85 per dollar.On Wednesday, the U.S. central bank kicked off an anticipated series of interest rate cuts with a larger-than-usual half-percentage-point reduction and policymakers see another 50 basis points of cuts in 2024. More

The City of London Corporation has repeated calls for a financial and professional services plan to convert interest in British assets into cash as Prime Minister Keir Starmer prepares to host his first international investment summit next month.Britain needs to provide a “streamlined and organised system” led by a public-private council chaired by the Chancellor, Britain’s finance minister, said Chris Hayward, Policy Chairman of the City of London, which administers Britain’s main financial centre.The City of London report said sovereign wealth and public pension funds had more than doubled their UK investments in the five years after opening an office in Britain, compared to the five years before.This has resulted in an additional 13.4 billion pounds of investment, involving 92 deals, into key areas such as innovative technology, infrastructure and renewable energy, it said.”The road to economic growth passes through the City, therefore there must be a plan to both prioritise and capitalise on the contribution of financial services to foreign investment,” Hayward said.($1 = 0.7572 pounds) More

Fed officials kicked off rate cuts with a half-point reduction, confident that inflation is cooling and eager to keep the job market strong.The Federal Reserve cut interest rates on Wednesday by half a percentage point, an unusually large move and a clear signal that central bankers think they are winning their war against inflation and are turning their attention to protecting the job market.“Our patient approach over the past year has paid dividends,” Jerome H. Powell, the Fed chair, said during his news conference. But now “the upside risks to inflation have diminished, and the downside risks to unemployment have increased.”The Fed’s decision lowers rates to about 4.9 percent, down from a more than two-decade high.The pivot comes in response to months of fading inflation, and it is meant to prevent the economy from slowing so much that the job market begins to weaken more painfully. Officials have been keeping a careful eye on a recent uptick in the unemployment rate, and by starting off with a big cut, the Fed is in effect taking out insurance against a bigger employment slowdown.Reinforcing that cautious message, the decisive reduction came alongside economic projections that suggested a more rapid pace of rate cuts than officials had envisioned just a few months ago. Officials now expect to make another half-point reduction before the end of the year.“We’re going to take it meeting by meeting,” Mr. Powell said. “We made a good, strong start to this, and that is frankly a sign of our confidence, confidence that inflation is coming down.”Jerome H. Powell, the Fed chair, said that the central bank would take future interest rate cuts “meeting by meeting” after lowering rates by a half percentage point, an unusually large move.Tom Brenner/ReutersWhere Fed Officials Expect Rates Will Be More