Mike Dolan’s outlook for the day ahead for US and global markets
On Thursday, world markets embraced the Fed’s new stance after the usual hesitant reaction on the first dayIt is recognized as the Holy Grail of economic soft landings .
Federal Reserve Chairman Jerome Powell on Wednesday described a sharp half-percentage point cut in interest rates as a “rebalancing” rather than an emergency panic, a move that investors saw as a signal that the central bank would act without succumbing to pressure from a weakening economy. The new “neutral” move.
Only one dissenter — Fed Governor Michelle Bowman — apparently believes the economy needs only a quarter-percentage point cut.
Overall, this is the balance stocks have been praying for all year. Although Wall Street (.SPX) retreated at the close, futures were still up 1-2% by today’s close, setting new highs.
U.S. Treasuries appear to have priced this in, with the two-year yield falling to a near two-year low of 3.6% on Thursday and the gap between the 2-year and 10-year yield curve widening to 10 basis points — the most positive since mid-2022.
The US dollar briefly hit a new low of the year after the Federal Reserve cut interest rates, but has since stabilised, with the USD/JPY rising ahead of the Bank of Japan’s latest decision on Friday . The pound rose to its highest level in 30 months, with the Bank of England expected to cut interest rates again later today.
Powell and his colleagues shifted their focus from inflation to the job market in a press conference and through the Fed’s latest economic and interest rate forecasts, pointing to a 50 basis point tapering by the end of the year and 100 basis points in 2025.
It lowered its inflation forecast for next year to one-tenth of the Fed’s 2% target and raised its unemployment forecast to 4.4%, giving officials confidence in a return to what they now consider the long-term neutral rate.
Although he has raised “long-term” interest rates by a tenth to 2.9%, he expects to achieve this target in 2026 – which is about 200 basis points lower than the new policy rate of 4.75-5.00%.
Although the Fed has signaled a 50 basis point rate cut at its remaining two meetings this year, futures prices have risen by more than 70 basis points – suggesting a rate cut of about 200 basis points is possible by this time next year.
For example, Bank of America now expects to cut interest rates by 75 basis points by the end of the year — a rationale it says emphasizes taking action before the labor market softens, which would force the Fed to “potentially cut rates further.”
Employment data will be extremely sensitive from now on, so Thursday’s weekly jobless claims will be the first test.
On the other hand, Wednesday’s sharp rate cut highlighted that the housing market has rebounded and should support continued expansion — which is expected to be 3% this quarter. Homebuilding has surged more than 15% in the past month as 30-year fixed mortgage rates have now fallen to a two-year low of 6.15%.
As far as the financial markets are concerned, the basic rule is that when the Fed begins cutting interest rates to spur sustained economic expansion, stocks tend to rise by an average of more than 16% over the following year — including large and small stocks.
Small-cap Russell 2000 futures were up about 3% before the start of trading on Thursday.
World stock markets also rose generally as US futures fell on Thursday. Benchmarks in Tokyo (.N225) and Hong Kong (.HSI) rose 2%, the former benefiting from a rebound in the yen and the latter after the Hong Kong Monetary Authority cut rates.
The Fed’s move, which will give policymakers in Beijing until Friday to provide relief , also boosted Chinese stocks, with the offshore yuan appreciating to its highest level since May last year.
European stocks (.STOXXE) and (.FTSE) also rose 1%.
Elsewhere, the Fed’s accommodative policies have had less impact.
Although the Bank of England is expected to delay its second interest rate cut this year until November on Thursday, it will still provide details about its ongoing balance sheet reduction process.
A repeat of last year’s £100 billion target next year is likely to significantly reduce active BoE bond sales, as the calendar will be heavy with maturing debt and sales will naturally fall.
Norway took a similar stance, with its central bank keeping interest rates unchanged at 4.5% on Thursday. Brazil took the opposite step, raising interest rates for the first time in two years on Wednesday.
Key developments that will provide further direction to US markets on Thursday:
* Bank of England’s policy decisions, meeting minutes and annual balance sheet targets; South African Reserve Bank and Central Bank of Turkey are responsible for policy setting.
* US weekly unemployment claims, September Philadelphia Fed business survey, August existing home sales, second quarter current account
* Speech by Isabel Schnabel, Member of the Board of Directors of the European Central Bank
* U.S. Treasury sells 10-year inflation-protected securities
* US companies benefit: FedEx, Lennar, DardenRestaurants, FactSet
The views expressed are those of the author. They do not reflect the views of Askume News, which is committed to integrity, independence and non-partisanship under the principles of trust.
