Shifting rate expectations driving US outperformance

Rising expectations of a 50 bps rate cut from the Fed is helping US outperformance, while Carney’s financial stability report has boosted bank shares.

• Double rate cut hopes drive US outperformance 
• No-deal Brexit could drive BoE rate cuts
• UK business confidence to remain key GBP drag 

Hopes of a double rate cut from the Fed is helping drive US market outperformance once again today, with Jerome Powell’s two-day testimony driving expectations of a 50-basis point move up to 19.5% (vs 3.5% on Monday). Of course, this leaves an 80.5% expectation that the Fed will cut rates by 25 basis points this month, and thus the boost seen from this recent change in expectations could be relatively short-lived. Meanwhile, with these dovish tones from the Fed driving the dollar lower, we are seeing European stocks stutter in the wake of a strengthening euro and pound. 

While GBPUSD is on the rise due to the Powell-led dollar devaluation, Mark Carney’s recent shift in tone is driving up expectations of a post-Brexit rate cut. Markets are currently pricing in a 48% chance that the BoE will cut rates in January, and thus there is plenty reason to believe the pound will fall further before long. Today’s financial stability report was a positive one for UK banks, with the likes of Barclays and RBS outperforming the index amid Carney’s claims that the sector is fully prepared for even the worst form of Brexit. However, Richard Branson’s comments over the huge fallout of a no-deal Brexit are indicative of a wider decline in business confidence, with the likely  Brexit brinksmanship meaning firms may only know the new rules just days before they are imposed.