Market Overview

Federal Reserve System’s Federal Open Market Committee (FOMC) due to release its FOMC meeting minutes on Wednesday (19:00 pm GMT). The markets does not expect a major news from it. However, it is vital for every financial institution in the world to understand the future sentiment for monetary policy in United States. The sentiment on the market is positive towards Fed rate unchanged until July 2020 with 43% of investors seeing rates unchanged according to CBOE Target rate probability futures. Vast majority of the investors (99.3% says rates unlikely to change on FOMC December meeting). For the last decade, FED is not anxious to change interest rates due the presidential election year. The exclusion was 2008 when subprime mortgage market spur a tremendous financial disaster in US and worldwide.

After cutting target range by 25 bps to 1.50-1,75% October 30th, the Fed is seen now looking for the halt in further rate actions. United States core inflation level remains under control at 2.0-2.4% this year down by 0.1 to 2.3% in October. The effective Fed rate discounted on CPI is almost at zero level (0.059% for end of October). It can be said a balance between monetary policy and economics is reached. At least Fed is always targeting core inflation in US to adjust interest rates. In addition US monetary policymaker launched a NOT QE to add $60 bln in liquidity to financial market by buying short-term T-bills. A disputed move but it managed to ease yield’s curve flattening problem when short-term T-bills and up to 7-year government bonds yields performed approximate yields.

US President Donald Trump on Monday had a “good & cordial” meeting at the White House with FED’s Jerome Powell. “Everything was discussed including interest rates, negative interest, low inflation, easing, Dollar strength & its effect on manufacturing, trade with China, E.U. & others”, Trump posted on Twitter. A frequent critic of Federal reserve and Powell himself Trump this time refrained from attacking US monetary policymaker that could mean more or less consensus between the two is reached. Trump needs low interest rates to ginger up economy. FED said in a press release Powell did not discussed expectations for monetary policy, except to stress the policy will depend entirely on incoming macroeconomic information. Powell does not see a probability of a recession at the moment. That mean US economy prospects on a path without any need of interest rates action.

Quantitative easing shapes the market

The markets are still benefiting from the monetary stimulus throughout the world. European central bank and Bank of Japan a key policymakers on the monetary market holding interest rates in a negative zone. ECB last September slashed its bank deposit rate to an all-time low -0.5%. Former ECB president Mario Draghi has announced it will restart its quantitative easing measures and resumed buying up eurozone government bonds at a rate of €20 billion in November, “for as long as necessary” until 2%, but just below, annual inflation is achieved. Bank of Japan is holding interest rates below zero for more than 8 years. Discussion on further cuts up to -0.5% is under way.

Bank of England, Reserve Bank of Australia, Reserve Bank of New Zealand are keeping their interest rates below or equal 1% margin. China has recently cut its interest rates to 4.15% and short-term funding rate to 2.5%, a first time since 2015.

Are we close to see a turnover in monetary policy? Such a scenario was expected this fall by ECB, but eventually it did not happened. So far, ECB stressed an excessive financial risk-taking as well as slowdown in bank profitability as major challenges in euro area. This could overshadow the growth prospects for European economy, which ECB forecasted at 1.1% this year and 1.2% in 2020. Luis de Guindos, Vice President of the ECB told CNBC “growth is more modest than what it was six months ago” when recent forecast by ECB was made. Will there be any signs of monetary policy tightening in Europe it could be seen from a new ECB’s president Christine Lagarde’s first public speech this Friday.

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