The Federal Reserve lowered its benchmark interest rate for the third time this year but implied this time that it might pause its easing cycle. Fed cuts target interest rate 25 basis points to a range of 1.50-1.75%, as expected. In cutting its target rate by a quarter of a percentage point, the Fed dropped a previous reference in its policy statement that it “will act as appropriate” to sustain the economic expansion - language that was considered a warning for future rate cuts. Instead it stated it will “monitor the implications of incoming information for the economic outlook as it assesses the appropriate path” of its target interest rate. Fed Chairman Powell said the U.S. consumer does not seem to have been affected by weakness in other sectors of the economy so far. U.S. stocks extended slight losses but then bounced back with the S&P 500 last up 0.4%. The dollar index firmed then slipped and was last off 0.2%.
The Bank of Japan kept its monetary policy steady but introduced new forward guidance signalling future rate cuts, highlighting its concern over simmering overseas risks. As expected, the BOJ maintained its short-term interest rate target at -0.1% and a pledge to guide 10-year government bond yields. Instead of changing the rates, the BOJ opted instead to modify its forward guidance - a signal central banks give to markets on future policy moves - to indicate more clearly its readiness to cut rates in the future if needed. Data this week showed Japan’s industrial output rebounded in September while retail sales jumped the most in over 5 years, but exports continued to contract and a sales tax hike this month has raised concerns that the world’s third-largest economy could tip into recession. In fresh quarterly projections, the BOJ also cut its inflation forecasts as falling fuel costs and soft household spending weigh on price growth. Core consumer prices in Tokyo, a leading indicator of nationwide inflation, rose 0.5% in October from a year earlier, still well away from the bank’s 2% target. Governor Haruhiko Kuroda has signalled that deepening negative rates would be the next step if the central bank felt compelled to ease further. Also giving the BOJ more breathing room, the yen has shown some signs of steadying recently. USDJPY is trading at 108.6 this morning having closed at 108.8 yesterday.
Oil prices rose as investors banked on more economic stimulus by China after weak PMI data, partly recovering from losses in the previous session on a surprise build in U.S. crude stocks. Brent crude was up 24 cents a barrel having fallen earlier in the session. It dropped by 1.6% yesterday but it’s been recovering since. U.S. West Texas Intermediate edged up by 10 cents at $55.16 a barrel, 0.9% lower the previous session. Factory activity in China shrank for a sixth straight month in October, while growth in China’s services sector activity slowed to the lowest since February 2016, official data showed yesterday.
The Hong Kong Monetary Authority (HKMA) said on Thursday that there was no obvious outflow of capital from the city’s banking system and that the local currency was largely stable. It came after speculation that following political protests, several investors were moving to other financial hubs, mainly Singapore. Chief executive Eddie Yue added that while the foreign exchange and money markets were operating smoothly, the public must prudently manage financial risk. Senior Hong Kong officials had previously warned of recession pressure given the global slowdown, U.S-China trade tensions and ongoing protests in Hong Kong. Yue’s comment came hours after HKMA lowered its base rate charged through the overnight discount window by 25 basis points to 2% earlier on Thursday, tracking the U.S. Federal Reserve’s rate cut overnight.