Bank of England shocks with with a 150-bp rate cut to 3.00% (lowest level since 1954), against expectations of 50-bp cut, making the biggest rate cut since the central bank acquired operation independence 11 years ago. The Swiss National Bank also surprised in an unscheduled meeting with a 50-bp rate cut to 1.75%. Sterling collapsed by a full 2 cents in less than 3 minutes to $1.5710 before jumping back by more than 3 cents towards $1.6020 and later dropping back towards $1.5850s, as surging volatility widens price spreads and impacts liquidity.
The European Central Bank did not surprise as it reduced its refinancing rate by 50-bps to 3.25%. ECB's president JC Trichet will deliver the post-announcement press conference at 8.30 am EST.
US Weekly Jobless Claims rose to 481K vs expectations of 477K.
The UK 's National Institute of Economic and Social Research estimated Q3 GDP to have contracted by 0.5% from an initial estimate of a 0.2% contraction, expecting the downturn will last into 2010.
The magnitude of today's interest rate moves not only reflect the gravity of the financial and economic dangers in Europe and their impact on the rest of the world, but also manifest the lateness of UK central bank policy makers, whose inflation-focus had clouded their ability to weigh the depth of the recession. Despite having acquired operational in May 1997, the Bank of England was bound to a government-imposed inflation target (not ceiling as in case of ECB), now at 2.0%.
Pre-US Jobs Central Bank Action? The global fallout from yesterday's 5% slump in Wall Street ought to have played a role in forcing the hand of the BoE into making today's historic move. Tomorrow's US non-farm payrolls for October are expected to show a loss of more than 220K (biggest since November 2001), while the unemployment rate hitting a fresh 5-year high of 6.3%. Considering the momentum of sectoral employment deterioration , we expect a payrolls decline of as much as 310K. An unemployment rate above 6.3% would be the highest since 1994. Yesterday's ADP report on private payrolls showed a decline of 157K in October (highest since Nov 2002). The impact on US and global markets of such a report could be of escalating volatility, favoring the lower yielding currencies. We continue to expect USDJPUY will not reach its cyclical low until end of 2009, early 2010 at 77 yen.
Ashraf Laidi
http://www.ashraflaidi.com
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