The reaction to the Republicans sweeping into power saw equities advancing to record highs alongside higher yields and a stronger dollar on Trump's pro-growth fiscal agenda, moves largely foreseen pre-election. However, across the course of the week, the curve inverted, with the Fed indicating it would move towards a more measured approach to easing. European assets were the clear point of weakness, equities underperforming and the euro falling with the prospect of increased tariffs intensifying the headwinds to the growth outlook and the implosion of the German government key developments.
A 25bps rate cut from the Fed to 4.5-4.75% continued the process of recalibrating policy away from restrictive settings. While rates in the US will continue to fall, markets took away from the meeting that the pace of easing is likely to slow. Post-meeting pricing indicates that markets see the December meeting as a line-ball call between a hold or a 25bps cut, leaving the data to shape expectations one way or the other over the coming weeks. Over the next 12 months, rates are seen falling to the 3.75-4.0% range; however, that outlook will clearly be subject to the policies enacted by the new administration - something that Chair Powell would not speculate on during the post-meeting press conference. Away from the election, Chair Powell said the focus for Fed was in managing the risks to the economy from moving either too quickly or too slowly in returning rates towards a more neutral setting. Key observations on the economy from Chair Powell included downside risks to growth had eased; the labour market was no longer a major source of inflationary pressures; while core inflation remained elevated relative to the 2% target.
A second cut for the easing cycle from the Bank of England (BoE) was voted through by the Monetary Policy Committee (MPC) in an 8-1 analysis, lowering Bank Rate by 25bps to 4.75%. The higher level of alignment amongst MPC members compared to the narrow majority (5-4) that cleared the first cut in August was dovish; however, with the UK budget measures expected to boost both growth and inflation, the guidance that a 'gradual approach' would be taken in dialing back restrictive monetary policy settings was reaffirmed. Market pricing implies the BoE is expected to continue to cut rates on a quarterly profile, with the next cut coming in February. Further out, markets see rates being cut to 4% by Q3 next year, up from 3.75% priced before the UK budget.
The effects of the measures in the UK budget were incorporated into the BoE's latest forecasts in the November Monetary Policy Report. The BoE forecasts that the measures will boost growth by around 0.75ppt over the coming year, driving an uplift in the GDP growth outlook for 2025 from 0.9% to 1.7%. Stronger activity, however, is expected to add to inflationary pressures, pushing up the forecast for CPI in 2025 from 2.2% to 2.7%. This has lengthened the glide path for the return of inflation to the 2% target, pushed back from 2026 into 2027. While these are the modelled effects, there is significant uncertainty for the BoE in how the measures will work through the economy. Accordingly, the message from Governor Bailey in the post-meeting press conference was that the situation warranted moving cautiously in lowering rates.
In Australia, the RBA remained on hold at 4.35% on the cash rate, bringing up 12 months of steady rates. Governor Bullock's pushback to rate cuts has not waivered and that has been a factor in markets repricing the first cut well out into the middle of next year. Updated forecasts published in the Statement on Monetary Policy were largely unchanged from the August round, with a return to the 2-3% inflation target band still projected for 2026 - despite the sharp decline in headline inflation in Q3. Detailed analysis of the RBA meeting is available in my review here. On the data front, a weakening terms of trade continues to see the trade surplus narrow coming in at $4.6bn in September (see here).