FOMC rate cut brings mixed emotions for markets

European markets are enjoying a buoyant start to the day, although the FTSE 100 and 250 are lagging their mainland counterparts, taking a more cautious tone ahead of today’s Bank of England rate decision. Coming in a week that has already seen the Bank of Canada, Norges Bank, and Federal Reserve cut rates, UK borrowers are unlikely to enjoy the same treatment today. Instead, the BoE are expected to keep rates steady for the remainder of 2025 as inflation levels remain well above the 2% target. Nonetheless in a week that brings a raft of key data points out of the UK, the mix of higher claimants and falling core inflation could at least help push the narrative that the bank will need to become more accommodative if that trend persists. Today’s meeting is instead likely to place greater emphasis on the bank’s quantitative tightening programme. With the BoE having to rely more heavily on active gilt sales to achieve reductions to its balance sheet, expectations are that it will signal a significant slowdown in the pace of QT. For markets, a slower withdrawal of liquidity could ease some upward pressure on gilt yields, while also weighing on sterling if investors read it as a more dovish tilt in policy.

Overnight data out of Australia saw a major miss in the jobs report, with the employment change figure falling to -5.4k despite expectations of a healthy 21.2k rise. This is the third hefty miss in the past four-month, highlighting the potential similarities to the US given that both still have relatively stable unemployment rates. This has led to AUD declines across most of the pairs this morning, with markets now expecting a rate cut from the RBA in November (61% chance). However, that weakness has been overshadowed by the decline in the New Zealand dollar which has been heading sharply lower off the back of a concerning -0.9% decline in Q2 GDP. This came thanks to a 3.5% decline from goods-producing industries, led by steep declines in mining (-4.1%) and manufacturing (-2.4%).

The Fed struck a cautious tone at yesterday’s FOMC meeting, leaving markets to weigh up the potential pathway for rates against the backdrop of a highly divided committee. Of the 19 officials, nine still anticipate two more rate cuts this year, while six see no further easing. While this underscores the divisions in the Fed, market expectations for an additional two rate cuts this year have bumped up from 70% to 85% in response. Things are less optimistic for 2026, with the Dot plot signalling a mere single cut for next year – well below the three priced by markets. If anyone questioned the Fed’s independence of late, Jerome Powell made sure to push back with his claim that the central bank doesn’t “feel the need to cut quickly.” His cautious approach in the face of recent job market weakness does serve to highlight that this current period of easing takes place against a backdrop of rising concerns around the inflation element of the dual mandate. While the pace of easing remains uncertain in the medium term, the fact we are seeing rate cuts at a time of record high US equity markets does provide the basis for optimism that the bulls will remain in charge for some time yet.