So the Federal Reserve cut interest rates by 25 basis points to 4.5 percent as expected. However, US Treasuries fell after the decision as the FOMC said in its statement that "the upside risks to inflation roughly balance the downside risks to growth", suggesting that the Fed is not looking at a series of a rate cuts in the following months.
Surprisingly strong third quarter GDP growth possibly influenced the Fed's decision and statement. Bloomberg reports the GDP data.
Economic growth in the U.S. unexpectedly accelerated in the third quarter as increases in exports, consumer spending and business investment made up for another plunge in home construction.
Gross domestic product grew at an annual rate of 3.9 percent, the most in more than a year, the Commerce Department said today in Washington...
Mild inflation figures helped too.
The GDP figures are adjusted for inflation and the acceleration in growth came in part because of the smallest gain in overall prices since 1998. The report's price index rose at a 0.8 percent annual rate after a 2.6 percent second-quarter rise.
Other US economic data released yesterday were mixed.
The National Association of Purchasing Management-Chicago said its business-activity index fell to 49.7 in October, from 54.2 the previous month. Readings below 50 signal a contraction. The median forecast among economists surveyed by Bloomberg News was for a drop to 53.
Companies in the U.S. added 106,000 jobs in October, more than economists had forecast, according to a report today from ADP Employer Services. A report from the Labor Department also showed employment costs rose in the third quarter at a slower pace than in the previous three months, suggesting increases in wages and benefits aren't heating up inflation. Additional figures from the Commerce Department showed construction spending increased last month as the building of factories, hotels and schools compensated for a drop in housing.
The European Central Bank is unlikely to cut rates soon, although the economic data yesterday were also pointing in conflicting directions. From Bloomberg:
The inflation rate in the 13-nation euro area rose to a two-year high of 2.6 percent from 2.1 percent in September, the European Union's statistics office in Luxembourg said today. That was above the 2.3 percent expected by economists. An index of executive and consumer sentiment fell to a 19-month low of 105.9 in October, according to a separate report...
Unemployment fell to 7.3 percent in September, the lowest since the data were first collated in 1993, from 7.4 percent in August, according to other data released today. Eurostat, the statistics office, adjusted the August figure from 6.9 percent as part of revisions to the entire series.
Another major central bank that met yesterday was the Bank of Japan. Its decision to leave rates unchanged was expected but more significant is the expectation for future rate increases, which fell after the BoJ cut its growth and inflation projections for the economy. Bloomberg reports:
The Bank of Japan forecast slower economic growth and abandoned a prediction that consumer prices will increase this year, making it harder to raise the world's lowest borrowing costs...
Prices excluding fresh food will be unchanged in the year ending March 31, the central bank said in its semiannual outlook. In April it forecast a 0.1 percent gain. The economy will expand 1.8 percent this year, it said, slower than the 2.1 percent predicted six months ago, in part because of a "swing in housing investment" following the change in regulations...
Policy makers also gave forecasts for the fiscal year starting April 2008. Core prices will probably rise 0.4 percent and economic growth will accelerate to 2.1 percent in the period, the bank said. In April they predicted inflation of 0.5 percent. The growth projection was unchanged from six months ago...
Wages fell 0.5 percent in September, the ninth drop in 10 months, the Labor Ministry said today. Summer bonuses fell for the first time in three years, making it harder for companies to raise prices to pass on higher raw-material costs.
But don't rule out a rate increase from the BoJ.
Keeping rates "very low" for too long could encourage excessive investment and hamper growth over the long term, the board said. The bank will "adjust the level of interest rates gradually in accordance with improvements in the economic and price situation," it said, repeating language used in April.
We'll have to wait for data showing the improvements in the economic and price situation though. They were not very evident in October's manufacturing data reported by Reuters yesterday.
The Purchasing Managers Index (PMI), which gives an early snapshot of the health of manufacturing, slipped to a seasonally adjusted 49.5 in October from 49.8 in September, staying below the crucial 50 level for a fourth consecutive month.
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