Sep 17 (Askume) – Mike Dolan’s day-ahead outlook for US and global markets
With the Federal Reserve’s easing policy coming into focus , U.S. stocks are not slowing falling, underscoring a troubling aspect of the central bank’s decision this week.
In a new sector rotation from large-caps (.NDX) to small-caps (.RUT) , the equally-weighted S&P 500 (.EWGSPC) restructured the major index (.SPX) to take some of the pressure off a handful of mega-cap stocks.
The index is up more than 11% this year and nearly 20% over the past 12 months, a sign that market enthusiasm is no longer the exclusive domain of the Big Seven or artificial intelligence topics.
But the broader easing of financial conditions stemming from this market optimism could keep it cautious as the Fed begins a two-day meeting on Tuesday and considers the size of its first rate cut this cycle.
For example, the Chicago Fed’s Composite Financial Conditions Index is currently at its lowest level since November 2021.
Could the Fed think the market is counting on it easing policy and push for a modest 25 basis point rate cut for good measure?
The “25 or 50” debate remains the sole focus of Wednesday’s fixed-point announcement, and advance speculation will clearly influence the market’s own reaction to the Fed’s policy.
Currently, Fed futures are leaning toward a 50-basis-point gain, having priced in about 42-basis points earlier Tuesday, with a 120-basis-point easing expected for the remainder of 2024.
For example, strategists at Morgan Stanley believe that the reaction to the final outcome will largely depend on what the Fed’s latest “dot plot” forecasts for future policy rates show.
He said if the Fed cuts rates for only a quarter of a century and no policymaker anticipates a reduction of more than 75 basis points by the end of the year, that could be a boon for risk assets because it would signal a consensus that the economy doesn’t need more rate cuts.
Another bullish scenario is a rate cut of 50 basis points, the investment bank said, with some seeing a rate cut of no less than 75 basis points in 2024, suggesting the Fed is unsure whether the economy needs 50 basis points but will cut interest rates nonetheless.
Flip all of this around to deal with more negative situations.
Despite the level of dissent within the committee, a 50 basis point rate cut appears unlikely.
Former New York Fed President Bill Dudley called for a 50 basis point rate hike last week in response to the cooling labor market. White House adviser and former Fed Vice Chair Lael Brainard also stressed this point on Monday, saying, “It is important to preserve the significant progress we have made in the labor market.”
Markets remained active on Tuesday as the Fed makes its final check on the health of the economy before making its decision, followed by August retail sales and industrial production data.
The S&P 500 is near a record high, while the two-year Treasury yield is hovering near a two-year low of 3.55%, more than 180 basis points below the current Fed policy rate. The 2-10-year yield curve remains slightly positive at about 6 basis points.
The VIX (.VIX) stock volatility gauge fell to 17, just below the long-term average.
The US dollar index (.DXY) is weakening again and is slightly off its yearly low.
USD/JPY is trying to get back above 140 when Japanese markets reopen on Tuesday, but the yen’s latest surge to a 15-month high this week has rattled the Nikkei stock index ( .N225) . The index fell more than 1% after the reopening.
European stocks (.STOXXE) and (.FTSE) were stronger as central bank easing has begun across the continent and is expected to continue.
Backward technology
Elsewhere, large-cap tech stocks underperformed, performing particularly poorly on Monday.
Apple (AAPL.O) shares fell nearly 3% after analysts at TF International Securities said demand for its latest iPhone 16 models was lower than expected, leading to a shorter delivery time. However, they were steady overnight, with S&P 500 stock futures also rising sharply in the premarket.
There was better news for Intel (INTC.O) , which saw its shares rise 6% on Monday after news broke that it qualified for up to $3.5 billion in federal grants to make semiconductors for the U.S. Department of Defense. The company then extended its gains in after-hours trading as its contract manufacturing business signed a contract with Amazon’s (AMZN.O) cloud services unit to become a customer for building customized artificial intelligence chips .
Meanwhile, Microsoft (MSFT.O) said its board of directors approved a new stock buyback program worth up to $60 billion and raised its dividend by 10%.
Key developments later Tuesday will provide further direction for US markets:
* US August retail sales, industrial production, September NAHB housing index, July business/retail inventories; Canada August CPI inflation
* The Fed’s Federal Open Market Committee begins a two-day policy meeting with a decision on Wednesday
* U.S. Treasury sells $13 billion in 20-year bonds
The views expressed are solely the author’s own. They do not reflect the views of Askume News, which is committed to integrity, independence and non-partisanship in accordance with the principles of trust.
