Bloomberg News: 5 things to start your day

Divided, they fall

The Federal Reserve’s 25 basis-point interest rate cut yesterday was accompanied by forecasts that showed officials were split over the need for further easing. In the post-decision press conference, Chairman Jerome Powell refused to be drawn on where he thinks rates should go for the rest of 2019, with markets pricing in about a 65% chance of another move lower by the end of the year. The differing opinions among FOMC members helped drive the spread between two- and 10-year Treasury yields close to inversion, with shorter-term yields rising as the long end slipped.

Also running

The Bank of Japan increased speculation it may ease policy further at its next meeting in October, with Governor Haruhiko Kuroda saying at today’s post-decision press conference that the institution is more positive towards adding stimulus than it was at its last gathering. The Swiss National Bank made no change to rate policy, while Norway’s central bank surprised by hiking rates for the fourth time in a year. The Bank of England makes its latest policy decision at 7:00 a.m. Eastern Time, with no change expected, and no press conference scheduled from Governor Mark Carney.

Growth slipping

The OECD cut economic forecasts, projecting global growth of 2.9% this year – a drop from its 3.2% outlook from four months ago, and the slowest pace in a decade. The worsening prognosis echos similar worries expressed by almost every monetary policymaker over the past week, and also comments from corporations feeling the pressure. The Paris-based institution also warned that a no-deal Brexit would push the U.K. economy into recession.

Markets mixed

Overnight, the MSCI Asia Pacific Index was 0.1% lower while Japan’s Topix index closed 0.6% higher, paring earlier gains as the yen strengthened in the wake of the Bank of Japan decision. In Europe, the Stoxx 600 Index was 0.3% higher at 5:50 a.m., with banks by far the best performers on the gauge. S&P 500 futures pointed to a lower open, the 10-year Treasury yield was at 1.793% and gold was holding under $1,500 an ounce.

Coming up…

There might be more interest than usual in this week’s initial jobless claims number when it is released at 8:30 a.m. after last week’s unexpected decline to 204,000. The Philadelphia Fed business outlook for September is due at the same time. At 10:00 a.m., existing home sales data for August will give another health check on the U.S. housing market after yesterday’s home starts data reached the highest level since 2007. Argentina’s second-quarter GDP is also published today, with the data unlikely to do much to move markets considering everything that has happened since.

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What we’ve been reading

This is what’s caught our eye over the last 24 hours.

• Why we love to call everything a bubble.
• Bonds’ biggest threat is Germany starting to splash the cash.
• Apple is suffering an identity crisis with consumers in China.
• Trudeau apologizes for wearing “brownface” makeup in 2001 gala.
• U.S. intelligence official to brief lawmakers over mystery complaint.
• Trump is biggest risk to world economy, says Philippine central bank governor.
• How to feed a Mars colony of one million people.

And finally, here’s what Joe’s interested in this morning

The recent turmoil in the repo market has opened the possibility that the Fed could expand its balance sheet to supply the market with adequate reserves. This has people asking whether such a move would count as a new round of quantitative easing. The answer is no. To understand why, you have to understand the mechanism via which QE actually eased policy. It wasn’t the asset purchases themselves that mattered, but rather the very signal the policy sent. The action by the Fed, in the wake of the financial crisis, effectively signalled that as long as it was buying assets, it would not be hiking rates. Technically there was nothing stopping the Fed from buying assets and hiking rates at the same time, but it was understood that with short-term rates basically at zero, that asset purchases were a substitute for more rate cuts. Thus over the life of the purchase plan, investors knew hikes wouldn’t be in the offing. The easiest way to grasp the link between QE and rate hikes is to consider what happened in 2013, when the Fed announced its plan to eventually taper its pace of bond buying. The spread between three-month and two-year yields immediately soared, as traders interpreted the taper announcement as essentially pulling forward the start of the eventual hiking cycle. Everyone grasped the link between bond buying and rate hikes. (The green line on the attached chart coincides with the taper announcement.) These days, the link between balance-sheet actions and rate moves has been severed. You can shrink or expand the balance sheet, and nobody interprets that as a signal on what they’ll do on rates. So for now that particular easing mechanism is gone, and you can have a period of asset purchases for the purpose of maintaining short-term funding markets that doesn’t have the same economic significance of post-crisis QE programs.