Sample Category Title

Summary

• As was widely expected, the FOMC lowered the fed funds target range by 25 bps to 3.75%-4.00% at the conclusion of its October meeting. Yet, Chair Powell made clear that additional easing in December was far from assured.
• The post-meeting statement gave a nod to the more limited slate of data the FOMC was able to take into account over the past month due to the government shutdown. The Committee did, however, suggest that its concern about the labor market did not worsen over the inter-meeting period.
• October's policy rate decision was not unanimous. Governor Miran dissented in favor of a steeper 50 bps rate cut while Kansas City Fed President Schmid dissented the opposite direction in favor of holding the fed funds rate steady.
• The divergent dissents are not wholly surprising given elevated inflation and flagging job growth have created some tension between the Committee's price and employment objectives. But with the jobs market outlook not obviously worsening over the past month, inflation still stubbornly above target, and policy now closer to neutral, the bar to another cut in December is higher.
• Our base case remains for the FOMC to reduce the fed funds rate by another 25 bps at its December meeting. That said, with finely balanced risks around the inflation and employment objectives, a deluge of data on the other side of the shutdown could quickly shift the outlook and our expectations for the December meeting. Chair Powell does not think it is a slam dunk decision, and neither do we.
• Notably, the FOMC announced that quantitative tightening would come to an end on December 1. This was one month sooner than our long-standing forecast, although in the grand scheme of the Fed's $6.6 trillion balance sheet, the one-month shortening of the roughly $20 billion monthly runoff will not have a material impact on longer-term yields, in our view.

FOMC Delivers October Cut, But the Bar is Higher for December

As was widely expected, the FOMC reduced the target range of the fed funds rate by 25 bps points to 3.75%-4.00% at the conclusion of its October meeting. The decision comes under odd circumstances. The ongoing government shutdown has deprived the Committee of key data used to inform its view of the economy. The belatedly-released September CPI report showed inflation still stuck around a 3% pace (chart), but the Producer Price Index has not been published, leaving a less complete picture of recent inflation than the FOMC would have ordinarily. Furthermore, while the Committee has grown more concerned about the state of the labor market the past few months, it did not receive data on nonfarm payrolls and the unemployment rate for September. What data have become available since the Committee last gathered continue to paint a picture of anemic hiring but low layoffs, keeping the jobs market in a delicate spot.

In a nod to the government shutdown affecting the data flow, the post-meeting policy statement said that "Available indicators suggest that economic activity has been expanding at a moderate pace" versus previously mentioning that activity had "moderated in the first half of the year." It further noted that recent private sector readings on the jobs market looked consistent with the slowdown in payroll growth and uptick in unemployment since the start of the year (chart).

However, concern about the jobs market does not appear to have increased further over the inter-meeting period. In the Committee's previous post-meeting statement, it noted that the downside risks to employment "have risen", yet today's statement read that those risks merely "rose in recent months." Similarly, the statement hinted that the FOMC does not see the current state of inflation as having worsened since mid-September; it said that "inflation has moved up since earlier this year", with the timing reference new.

Notably, today's rate decision was not unanimous. Governor Miran once again dissented in favor of a 50 bps rate cut. At the same time, Kansas City Federal President Schmid dissented in favor of keeping the target range unchanged. Dissents in both the hawkish and dovish direction speak to the difficult position the FOMC finds itself in at this juncture. Not only has visibility on the economy become more limited with the shutdown, but elevated inflation and flagging job growth have created some tension between the Committee's price and employment objectives.

Together, the subtle statement changes and two-sided dissents suggest the bar for another cut at the December meeting is getting higher. That message was made even more clear in the post-meeting press conference. In his opening remarks, Chair Powell shared that "A further reduction in the policy rate at the December meeting is not a foregone conclusion. Far from it. Policy is not on a preset course." The September Summary of Economic Projections already showed the Committee closely split between three 25 bps or fewer cuts this year (chart). With the policy rate closer to neutral, risks to the jobs market not obviously having worsened and inflation still stubbornly above target, the case for a third consecutive reduction in the policy rate has become less straightforward.

Our base case remains for the FOMC to reduce the fed funds rate by another 25 bps at its December meeting (chart). That said, with finely balanced risks around the inflation and employment objectives, a deluge of data on the other side of the shutdown could quickly shift the outlook and our expectations for the December meeting. Chair Powell does not think it is a slam dunk decision, and neither do we.

Balance Sheet Runoff to End December 1

The FOMC also announced today that its balance sheet runoff would end on December 1. This was one month sooner than our forecast, although in the grand scheme of the Fed's $6.6 trillion balance sheet, a one month shortening of the roughly $20 billion monthly runoff will not have a material impact on longer-term yields, in our view. Runoff of mortgage-backed securities will continue indefinitely, with the proceeds plowed into Treasury bills one-for-one such that the total size of the central bank's balance sheet is left unchanged.

The end of runoff comes at a time when money market rates have been rising in a sign that bank reserves are becoming less abundant (chart). The next phase of the Fed's balance sheet evolution will entail the central bank keeping its security holdings flat and monitoring carefully for the optimal equilibrium. It is important to note that even if aggregate balance sheet runoff ceases, that does not mean that balance sheet policy has shifted to neutral. If the Fed's balance sheet is held flat for an extended period of time, then it will still be shrinking as a share of GDP. Bank reserves will continue to decline gradually and in proportion to the growth in non-reserve liabilities on the Fed's balance sheet, such as currency in circulation.

Thus, eventually the Fed's balance sheet will need to resume growing again to prevent bank reserves from falling below the "ample" threshold. Our base case is that these reserve management purchases will begin in April 2026 and average approximately $25 billion per month, with purchases concentrated entirely in Treasury bills. If realized, this should be enough to keep the reserves-to-GDP ratio a little bit above 9%, a key threshold we and others have highlighted previously as a demarcation line between ample and abundant reserves (chart).

• The Fed cut its policy rate target by 25bp in its October meeting, as widely anticipated. Interest rate on reserve balances (IORB) was cut by an equal amount.
• Powell hawkishly underscored that the December rate decision is still far from a done deal. This led to a repricing of front-end rate expectations, with the implied probability of a December cut declining from above 90% to around 60%. EUR/USD rate declined to around 1.16.
• We make no changes to our Fed call and still expect a pause in December with the next cut in January.
• The Fed also announced an end to QT. Balance sheet runoff continues for mortgage-backed securities (MBS), but all maturing principal payments will be reinvested into T-bills from December 1 onwards. Markets were well prepared for the announcement with also the long-end UST yields shifting higher.

Ahead of the meeting, we expected Powell to avoid pre-committing to a December rate cut, but his clear pushback against the market pricing was more hawkish than even we anticipated. Powell emphasized that 'another cut in December is far from assured' amid the committee's 'strongly differing views' about the future, and that 'there is a growing chorus of feeling we should maybe wait a cycle'. He highlighted that despite the shutdown, available data does not signal significant further cooling in labour markets.

After the September meeting, we pointed out that the 'dots' signalled an almost even split between participants expecting cuts in both Oct & Dec, and those expecting only 0-1 cuts. We argued that markets underappreciated FOMC's willingness to pause, as ahead of this meeting, markets were pricing more than 90% likelihood for another cut in December. We stick to our call and expect a pause in December followed by the next cut in January. We still think the Fed is the best served by a more gradual approach towards further easing.

Markets were well prepared for the announcement to end QT. In our preview (see RtM USD, 28 Oct), we anticipated that the Fed would choose a less aggressive option of only ending the balance sheet runoff for US Treasuries. Instead, it opted to also 'neutralize' the runoff of mortgage-backed securities (MBS) by reinvesting the maturing principal payments to T-bills from December 1. Over the past few months, the pace of QT has been around USD5bn per month for Treasury securities and around USD16-17bn per month for MBS. Despite the seemingly 'dovish' balance sheet decision, UST yields moved higher already before the hawkish remarks in the press conference. This likely reflected Jeffrey Schmid's surprising dissent in favour of holding rates steady at this meeting. Less surprisingly, Stephen Miran also dissented, but in favour of a 50bp cut.

Powell flagged that eventually the Fed will look to start adding to reserve balances by increasing the size of its balance sheet again but did not yet speculate on the timing. The Fed did not perform an additional cut to the IORB rate, as speculated by some ahead of the meeting. This would have been an even more aggressive measure to ease the upward pressure seen in repo rates over past weeks and remains a possibility for future meetings.

Nasdaq-100: ⬆️ Buy

• Nasdaq-100 broke resistance area
• Likely to rise to resistance level 27000.00

Nasdaq-100 index recently broke the resistance area between the resistance level 26000.00 and the resistance trendline of the extended daily up channel from May.

The breakout of this resistance area accelerated the active short-term impulse wave iii of the impulse wave 5 from the start of Septembers.

Given the strong daily uptrend and rising daily Momentum, Nasdaq-100 index can be expected to rise to the next resistance level 27000.00 (target price for the completion of the active impulse wave iii).

Fed lowered the federal funds rate by 25 basis points to 3.75–4.00%, in line with expectations, but revealed a three-way split among policymakers. Governor Stephen Miran voted for a deeper 50bps reduction, while Kansas City Fed President Jeffrey Schmid preferred to hold rates steady. The outcome highlights differing views within the Committee over the balance between inflation control and downside risks to growth.

In its statement, the Fed offered no explicit forward guidance, reiterating that it will “continue to monitor incoming information” and stands ready to adjust policy as appropriate should new risks emerge.

The Committee described economic activity as expanding at a moderate pace, with job gains slowing and unemployment edging higher but still low through August. Inflation was noted as having moved up since earlier in the year and remaining “somewhat elevated.”

The Fed also acknowledged that uncertainty about the outlook remains elevated, with downside risks to employment having increased in recent months.

Full FOMC statement here.

Available indicators suggest that economic activity has been expanding at a moderate pace. Job gains have slowed this year, and the unemployment rate has edged up but remained low through August; more recent indicators are consistent with these developments. Inflation has moved up since earlier in the year and remains somewhat elevated.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook remains elevated. The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment rose in recent months.

In support of its goals and in light of the shift in the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 3-3/4 to 4 percent. In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee decided to conclude the reduction of its aggregate securities holdings on December 1. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Susan M. Collins; Lisa D. Cook; Austan D. Goolsbee; Philip N. Jefferson; Alberto G. Musalem; and Christopher J. Waller. Voting against this action were Stephen I. Miran, who preferred to lower the target range for the federal funds rate by 1/2 percentage point at this meeting, and Jeffrey R. Schmid, who preferred no change to the target range for the federal funds rate at this meeting.

• The Labour government will likely face a big fiscal hole in the upcoming budget. We expect they will close the gap and deliver some welcomed fiscal tightening for markets, even if it will be unpopular amongst voters.
• We remain negative on GBP as tailwinds from more sustainable fiscal policies will be counterweighed by negative growth impact and a USD negative environment.

On 26 November, the annual Autumn Statement will be presented in the UK accompanied by independent forecasts from the Office of Budget Responsibility (OBR), the UK fiscal watchdog. Chancellor Rachel Reeves faces a significant fiscal shortfall, amongst others due to an expected 0.3 percentage point cut in trend productivity growth by the OBR. This adjustment, which is bigger than analysts had predicted of 0.1-0.2 percentage points, deepens the fiscal hole by approximately another GBP12bn, based on estimates from the Institute of Fiscal Studies, bringing the total shortfall to GBP30-40bn (including a modest GBP10bn. headroom). However, factors such as higher inflation and wage forecasts, along with the recent sharp decline in Gilt yields, could help offset some of the impact if accounted for by the OBR.

The large fiscal shortfall makes it increasingly challenging for the Labour government to uphold its promise to freeze income tax rates, National Insurance contributions and VAT, the three main sources of revenue. Reeves has indicated potential tax rises and spending cuts blaming Brexit and the previous Conservative government for the fiscal and economic troubles. We believe Labour will aim to address the fiscal gap now with the next general election still distant to avoid the risk of more tax hikes later. As a result, we think the budget is set to alleviate some pressure in the Gilt market.

Key for Gilt markets and GBP FX will be whether the government might adjust fiscal rules to avoid tough decisions. One option could be advancing next year's rule change, allowing a 0.5% of GDP deficit, which would ease budget pressures but risk alarming Gilt investors. The government's ability to fully address the challenge and secure sufficient headroom will be critical. Keeping Labour's promise appears difficult and could lead to reliance on uncertain revenues from new taxes or less credible spending cuts, both negative for Gilts. Breaking promises by raising more predictable revenues such as the income tax would be positive. A 1 percentage point increase to the basic rate would raise GBP8bn. according to the UK tax authorities. Alternatively, a VAT hike, which Reeves hasn't ruled out, could boost revenue but will trigger higher inflation, at least in the short term and in turn put upward pressure on short end UK yields.

We stay negative on GBP FX. While a significant tightening of fiscal policy would alleviate some pressure in terms of the negative impact from unsustainable public finances, we highlight the negative growth impact. If we get a significant tightening, this will act as a further headwind for the UK economy and likely trigger more substantial easing from the BoE. Combined with a global investment environment characterised by a positive correlation to a USD negative environment, in our view, favours a weaker GBP. We expect EUR/GBP to trend higher the coming year, targeting the cross at 0.89 in 12 months.

EUR/GBP hit new 2025 high and held at the highest levels since May 2023 on Wednesday.

Steep upleg from Oct 22 extends into sixth straight day, as sterling came under increased pressure from shift in monetary policy expectations which sees BoE rate cut as early as November (the MPC meets next week).

The latest economic data showed that inflation held steady last month, earnings grew at the slowest pace in almost three years, and unemployment ticked higher, setting stage for policy easing, against previous forecasts for no rate cuts this year.

Growing UK budget concerns also add to Pound’s recent weak performance.

Firmly bullish daily studies support the action, though overbought stochastic and RSI touching the borderline of overbought territory, warning that bulls might be losing traction that contributes to scenario of profit taking after strong rally.

Overall picture remains bullish and suggests that limited dips would be positioning for fresh push higher.

Former tops /trendline at 0.8750/40 and rising 10DMA / broken Fibo 61.8% (0.8700 zone) offer solid supports which should ideally contain dips.

Res: 0.8817; 0.8835; 0.8875; 0.8900.
Sup: 0.8750; 0.8700; 0.8650; 0.8631.

Cable hit three-month low on Wednesday, extending the steep bear-leg which emerged after strong upside rejection at daily cloud, into second consecutive week.

Fresh bears broke through important support provided by 200DMA (1.3239) and cracked 1.3200 level that unmasks key short-term support at 1.3141 (Aug 1 low (Fibo 38.2% of 1.2999/1.3788).

Today’s break of former low of Oct 14 (1.3248) generated another bearish continuation signal (continuation of larger downtrend from Sep 17 peak (1.3725).

Bears need close below 200DMA to open way towards 1.3141 pivot, break of which to complete bearish failure swing pattern on weekly chart and signal potential deeper correction of 1.2999/1.3788 (January – June uptrend) and expose psychological 1.30 support.

The notion is supported by daily MA’s now in full bearish configuration and strong negative momentum, from the technical perspective, while shift in fundamentals (growing expectations for BoE rate cut this year against previous forecasts for staying on hold until the end of the year) also contributes bearish near- term stance.

Broken 200DMA reverted to initial resistance, followed by session high / falling 5DMA (1.3280/85), which should ideally cap potential upticks and guard 10DMA (1.3342).

Res: 1.3239; 1.3280; 1.3300; 1.3342.
Sup: 1.3162; 1.3141; 1.3100; 1.3000.

The Bank of Canada delivered an expected 25 basis point rate cut today, lowering the overnight rate to 2.25%—the bottom of the neutral range that would not add to or subtract from inflation pressures over time.

Beyond the rate cut itself, two themes stood out from today's announcement. First, the Bank adopted a clear holding bias, stating that "Governing Council sees the current policy rate at about the right level" assuming future economic and inflation data evolve largely in line with current projections.

Second, the Bank emphasized concerns about structural economic damage from trade disruptions, reducing the effectiveness of monetary policy as a tool in addressing weakening demand while maintaining inflation control.

Overall, our base case assumes no further rate reductions, as we expect a ramp up in fiscal stimulus (with more details to come in the federal budget next week) will do the bulk of the heavy lifting in the policy response to address tariff-related, concentrated economic weakness.

The BoC’s latest baseline economy projections are in line with ours

The BoC’s guidance that the overnight rate is not expected to be reduced further is contingent on the economic outlook evolving in line with their base case projections that were the first since January. The Bank had resorted to scenario analysis in April and July due to volatile U.S. trade policy.

The Bank's overarching assumption behind the projections is that current tariff measures will remain in place. Key estimates regarding these measures—including a roughly 6% average effective tariff rate imposed by the U.S. on Canadian exports, with the majority of exports remaining exempt due to CUSMA compliance—align directly with our own analysis.

As a result, there is substantial alignment between our forecasts and the central bank's outlook. Both anticipate slow but positive growth in the Canadian economy through the second half of this year, followed by moderate acceleration in 2026 as trade related uncertainty starts to fade.

Headline inflation is expected to remain close to the 2% target over the forecast horizon. However, we see upside risks to this baseline projection primarily from robust domestic demand, given household spending that has broadly held on to resilience to-date and expectation that weakening in the labour market could be drawing to an end.

The Bank of Canada anticipates upside risks mainly from trade-related factors, such as larger-than-expected cost increases from tariffs or sudden reductions in sectoral tariffs.

It see downside risks to the inflation projections from softer than expected domestic demand, or a sudden tightening in global financial conditions sparked by a correction in AI related stock market valuations that have been tied to resilient growth in the U.S. economy this year.

BoC expects lasting structural damage to the economy from the trade shock

Beyond this cycle, the Bank of Canada expects structural damage from ongoing trade disruptions. Combined with slower population growth, Canada's potential output is expected to expand at a reduced rate of 1.6% in 2025 and 1.0% in 2026, before recovering slightly to 1.3% in 2027.

This structural damage will reduce the productive capacity of the Canadian economy and erode the effectiveness of monetary policy. In simple terms, as the economy's capacity shrinks, it will become increasingly difficult for the Bank of Canada to lower interest rates to stimulate demand without risking that demand will exceed what the economy can produce, thereby causing inflation.

This highlights the urgency for fiscal policy to step up by helping expand the economy's capacity limits—a priority we expect will account for the bulk of new spending to be announced at the fall budget update on November 4.