The Federal Reserve's dovish turn on interest rates, alongside Chairman Jerome Powell's somber assessment of the global economy, has investors betting in rare unanimity on near-term cuts as central banks around the world react to the new reality of slowing growth and weakening currencies.
Powell dropped a reference to being "patient" in monitoring incoming data and watching inflation gauges, as well as his previous view that downside pressures on consumer prices were "transitory", in favor of a more concerned view on growth and trade, adding that the central bank was "prepared to move and use our tools as needed" in order to defend what is only a few weeks away from being the longest economic expansion in U.S. history.
"While the baseline outlook remains favorable, the question is whether these uncertainties will continue to weigh on the outlook and thus call for additional monetary policy accommodation,' Powell told reporters in Washington after the Open Markets Committee left its key target rate unchanged at a range of 2.25% to 2.5%. "We will act as needed, including promptly if that's appropriate, and use our tools to sustain the expansion."
The CME Group's FedWatch tool, which assigns a market probability for future rate decisions, is pricing in a 99% chance of a July rate cut, with around two-thirds betting on a 25 basis point decline that would take the Fed's target range to 2% to 2.25%, and around one-third betting on a 50 basis point cut. Eight Fed officials are forecasting at least one rate cut this year, while two officials seeing two potential cuts between now and the end of the year.
Benchmark 10-year Treasury notes traded at a November 2016 low of 1.997% in overnight trading before easing to 2.008% later in the session, while the U.S. dollar index, which tracks the greenback against basket of six global currencies, was marked nearly 0.9% lower from Wednesday's levels to 96.65.
The currency move might be more notable than the drift in 10-year notes, however, given the broader concerns that President Donald Trump's constant criticism of the Fed, and Powell in particular, has influenced the central bank into its newly-dovish stance in order to weaken the U.S. dollar and facilitate American exports.
"The Euro and other currencies are devalued against the dollar, putting the U.S. at a big disadvantage," Trump Tweeted earlier this week when European Central Bank President Mario Draghi hinted at further easing to support the region's moribund growth. "The Fed Interest rate way too high, added to ridiculous quantitative tightening! They don't have a clue!".
The Bank of Japan followed the Fed and the ECB with a dovish take on rates Thursday, as well, with Governor Jaruhio Kuroda noting "downside risks regarding overseas economies are big, so we must carefully watch how they affect Japan's corporate and household sentiment."
"If the economy loses momentum toward achieving our price target, we'll of course consider expanding stimulus without hesitation," he told reporters in Tokyo.
The sudden change in tack from all three of the major central banks, each of whom had pledged to attempt to normalize policy rates earlier this year, has some investors worried that a global currency war could erupt amid in order to mitigate the economic slowdown triggered by the ongoing U.S.-China trade spat.
"Mario Draghi just announced more stimulus could come, which immediately dropped the Euro against the Dollar, making it unfairly easier for them to compete against the USA. They have been getting away with this for years, along with China and others,'' Trump Tweeted Tuesday. "Very unfair to the United States!''
G20 Finance Ministers and Central Bankers, meeting earlier this month in Fukuoka, reiterated an earlier commitment to refrain from "competitive devaluations" of their currencies in order to gain advantage in global trade.
That topic is likely to loom large later this month in Osaka, when Trump will meet China President Xi Jinping at the G20 leaders' summit, given that the Chinese yuan has fallen around 3.2% against the dollar since late April as trade tensions between the two escalated and Trump increased tariffs on $200 billion worth of China-made imports.
This may be why gold has had such an impressive run of late, with spot prices rising nearly 3% over the past two days to $$1,386.38 per ounce in overnight trading, the highest since March 2014.
"It is widely known that Gold flourishes and blooms in low interest rate environments, with a weakening Dollar supporting upside gains," said FXTM research analyst Lukman Otunuga. "With geopolitical tensions, ongoing US-China trade developments and concerns over slowing global growth clearly straining risk sentiment, Gold is likely to remain in fashion moving forward."