On Thursday’s Twin Transatlantic Rate Cuts

The “special relationship” between the US and UK is one of the most time-honored entities in geopolitics, and it took a fun turn Thursday: The Fed and Bank of England (BoE) cut rates a quarter point each, on the same day. This never happens on the same day! The Fed always does its thing Wednesdays, while the BoE has long been Thursday’s child. But the election pushed our friends at 20^th and Constitution back a day, so here we are. Twin rate cuts, no surprises and nothing earthshattering for stocks.

Markets had long penciled in these small cuts, and neither bank seems in the mood to defy expectations. In the UK, BoE Governor Andrew Bailey seemingly doesn’t want to rock the boat at a time when markets remain a bit nervous over last week’s Budget. And the Fed was probably always going to do whatever investors had penciled in prior to Tuesday’s elections, lest it appear political by throwing a curve ball right after the vote. Best save surprises for when things simmer down a bit, to the extent either bank thinks market-based projections are off kilter.

At any rate, we don’t think either decision is an economic or market gamechanger. Markets are forward-looking, and considering these were consensus expectations, it is fair to say both moves were pre-priced eons ago. And as for the economies, both countries were growing just fine at higher rates, and inflation has cooled back near their central banks’ targets. Neither needs lower rates, in our view, but slower inflation gives the latitude to do so. We doubt it is major stimulus, considering banks’ funding costs in both nations were well below benchmark overnight rates—the very reason hikes didn’t bite hard. And we doubt a quarter point makes an iota of difference to banks’ decisions on whom to lend to. But would-be borrowers like lower rates, so even if this only boosts sentiment a smidge, it isn’t a bad thing.

More interesting, to us, are the haps in long rates. In both nations—and globally—long rates rose after the Fed cut rates for the first time in September. We have seen a lot of chatter about politics driving this, what with last week’s UK Budget projecting increased debt issuance and everyone sure President-elect Donald Trump will push up US deficits with vast tax cuts once in office. Perhaps these factors affected US and UK rate movement relative to other nations, but they don’t explain similar volatility in Canadian and Australian rates. Or throughout Continental Europe. More likely, to us, is that bond rates reflect the popular view that rate cuts are stimulus and will breed faster growth and inflation—a point Bailey underscored today, calling UK inflation “stickier” than first forecast. We think this popular viewpoint overestimates rate cuts’ stimulative effects, but its proliferation seemingly argues against much lower long rates for the time being.

So we wouldn’t read much into yields’ sizable drops today. Mostly, they just undo volatility from earlier in the week. Maybe the effect lasts a little longer, maybe not. To us, it is all just a friendly reminder from markets that bonds can encounter sentiment-fueled wiggles, too. They have less expected volatility than stocks, overall and on average, but they aren’t immune to swinging emotions and traders’ occasional whims.

Overall, then, this week’s twin transatlantic rate cuts largely extend the status quo. Economies growing before the cuts should continue growing. Markets that were doing fine before cuts should keep doing fine. We wish we could add that the world would get over its fascination with central bankers when people see that not much has changed, but we have been doing this long enough to know better.