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Briefing highlights

  • Fed expected to cut rates this week
  • Stocks, loonie, oil at a glance
  • Canada targeted as EU to move on ratings issues
  • Pfizer in off-patent drug deal with Mylan
  • Required Reading

Who let the doves out?

The Federal Reserve is widely expected to cut interest rates this week, but a big question is whether markets will be satisfied with what the U.S. central bank does and says.

Central bank doves have been on a global flight, and will make their most significant move yet if, as investors believe, the Fed on Wednesday trims rates for the first time since the financial crisis.

Who let these doves out?

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The U.S. administration did, when, as President Donald Trump promised in his election campaign, it set about to right perceived wrongs in global trade, with a tariff war now playing out between Washington and Beijing, threatening global economic growth.

There's more behind it, of course, but the U.S.-China spat is top of mind among investors, and will take centre stage again this week both as the Fed meets and talks to resolve the trade fight resume.

Central banks and governments have been rolling out measures, though “not in a complementary fashion to achieve maximum benefit to support economic performance,” Citigroup analysts said in a report.

“Now, central banks face a dilemma: Whether to ease monetary policy in the hope that this ill offset trade uncertainty, bolster sentiment, and thereby support economic activity, or ease policy and witness widening asset market disconnects.”

Thus, we’ll have something of a balancing act for chair Jerome Powell and his colleagues on the Federal Open Market Committee (FOMC), the central bank’s policy-setting panel.

This comes, too, amid frequent attacks on the Fed by Mr. Trump, who wants to see lower interest rates and a weaker U.S. dollar.

"There's been plenty of speculation as to whether the Fed will cut by 25 basis points or 50 basis points when they sit down to meet this week against an uncertain geopolitical backdrop, with Fed chair Jerome Powell referencing 'cross currents' in his recent testimony on Capitol Hill to U.S. lawmakers," said CMC Markets chief analyst Michael Hewson.

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"Recent data from the U.S. economy do appear to suggest that we have started to see a slowdown from the strong numbers in Q4 and Q1, however there is much debate as to whether weak inflation justifies a move on rates at this early juncture," he added.

"One does have to bear in mind the political dimension to this with the incessant rants from President Trump about interest rates being too high, and his criticism of Jay Powell in general."

Analysts at Société Générale also cited how the economy is playing out, and, in particular, how it may appear odd for the U.S. central bank to consider cutting rates when the labour market is so strong.

“The reason, of course, is that central banks need to be forward-looking; the Fed has clearly expressed fears about slowing global growth trends allied to the risks from the trade war,” they said.

“In Europe, fears are mounting of a no-deal Brexit, possibly in conjunction with a snap U.K general election. Boris Johnson is making unequivocal statements that 31 October is the hard deadline – deal, or no deal; the EU is giving no ground.”

While the economy may be showing signs of fatigue, last week's reading of gross domestic product nonetheless showed economic growth was better than expected, at an annual pace of 2.1 per cent in the second quarter.

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That “doesn’t speak to a recession, and this could make some FOMC members reluctant to consider a cut,” CMC’s Mr. Hewson said, adding this “could see some dissent” if rates are trimmed.

"In the coming days it is widely expected that the Fed will bow to pressure by delivering a 25-basis-point cut in the headline rate, while keeping open the option to do another 25 basis points later in the year," he said.

"Anything other than a 25-basis-point cut would be a major surprise, with 50 basis points highly unlikely in the absence of a major shock."

But Paul Ashworth, chief U.S. economist at Capital Economics, wonders how markets would react at just 25 basis points, or one-quarter of a percentage point. He cited the disappointment among investors last week when the European Central Bank held off, but signalled action soon.

"The upshot is that after a week when the ECB disappointed the markets – even though it strongly hinted that a rate cut and more quantitative easing were coming soon – the Fed risks a similar market reaction if it cuts rates by only 25 basis points, particularly if one or more hawks dissent," Mr. Ashworth said.

"We expect a further slowdown in economic growth to prompt two more 25-basis-point cuts, in December and March next year."

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For the record, U.S. rate cuts have oft boosted stocks in the past, as Bank of Montreal noted.

“Perhaps the single biggest takeaway from past easing cycles is that equities have tended to rise six months after the rate cuts began while bond yields have been nearly flat on average – both in mini and in major easing cycles,” said BMO chief economist Douglas Porter.

"In seven of the 12 cycles, the S&P 500 has posted double-digit advances in the following six months. However, note that the two most recent cycles have run against that grain."

Mr. Porter, by the way, expects a "mini" easing cycle of just two Fed rate cuts.

So a dovish ECB is now looking at September, while Australia's central bank just trimmed its key rate. At home, some analysts believe the Bank of Canada will follow the Fed, though not as forcefully or as quickly, while others expect it to simply stand pat for a protracted period.

Up after the Fed will be the Bank of England, which has been plunged into Brexit uncertainty that will now be guided by a new prime minister.

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"For now, given the unique position the BoE is in, we continue to look for it to stay on hold until there is more clarity around Brexit," said BMO senior economist Jennifer Lee.

“But our bias is now clearly toward easing, not tightening.”

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Markets at a glance

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EU to move on ratings issues

The European Union plans to move this week to deal with credit rating issues in several countries, including Canada, the Financial Times reports.

The bloc will “strip five countries of some market access rights,” the news organization said, adding Brazil, Singapore, Argentina and Australia will also be affected. The European Commission will say these countries “no longer regulate credit rating agencies as rigorously as the EU does, removing a status that made it possible for European banks to rely on those ratings,” the FT said, citing a document it has seen.

These rights are known as equivalence provisions, the FT said, adding there is another avenue known as endorsement, under which agencies can establish businesses in Europe that “vouch” for ratings that come from somewhere else.

An official at DBRS Ltd. told the news organization the EU move won’t affect the Canadian agency.

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“We’ll continue to issue ratings from our U.S. and Canadian credit rating agencies that can be endorsed by our EU registered CRAs and therefore used for regulatory purposes in the EU,” she said.

Read more


Pfizer in off-patent drug deal with Mylan

From Reuters: Pfizer Inc. will separate its off-patent drugs business and merge it with Mylan, the two companies confirmed, bringing blockbuster treatments Viagra, EpiPen and Lipitor under one umbrella.

Ryanair CEO frets over Boeing

From Reuters: Ryanair is worried that further delays in the return of Boeing’s 737 Max to service could leave it without any of the jets next summer, forcing it to cut its growth plans further.

EU warns on commercial property

From Reuters: Commercial property shows signs of overvaluation in most European Union countries as yield-starved investors pile into bricks and mortar, the EU’s financial stability watchdog said.

Required Reading

LSE nears deal for Refinitiv

London Stock Exchange Group PLC is nearing a deal to buy Refinitiv Holdings Ltd. in a massive expansion of its financial data services offering that will put it in direct competition with Bloomberg LP. Jeffrey Jones reports.

Passenger bill of rights faces challenges

New rules that govern how airlines handle delayed travellers, lost luggage and other complaints are facing legal challenges on two fronts, with the aviation industry claiming the Canadian Transportation Agency (CTA) is exceeding its authority and passenger advocates saying the rules don’t do enough to protect flyers, Eric Atkins writes.

Savings account a better place

If you look at both risk and reward, high-rate savings accounts might be a better place for your money than any alternative. Personal finance columnist Rob Carrick tells you why.

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