Shaw and Partners

Central bank meetings fuelled market moves for the week. On Wednesday the Federal Open Market Committee (FOMC) concluded its two-day policy meeting, kicking off its rate cutting cycle with a 50bps reduction in its interest rate. Just a few weeks ago markets had been pricing in only an 18% chance of a 50bps cut, although on the day of the meeting this had increased to 70%, perhaps providing the Fed some cushion to enact the move without jolting markets. Market reaction on Wednesday was actually somewhat muted, with slight weakness in the major indices. However, the following session saw the S&P 500 and Dow Jones Industrial Average jump to record highs, with investors cheering the jumbo move and hopes of a soft landing for the economy.

The rally was unable to carry across to Friday’s session, but indices still saw gains. The S&P 500 was up 1.4%, with gains broad-based and the utilities sector ending the week at an all-time high. The Dow Jones closed at a new high, gaining 1.6% while the tech-heavy Nasdaq added 1.5%. Small caps which tend to be more sensitive to interest rates outperformed, with the Russell 2000 index advancing 1.9%. Economic data for the week was generally positive, with weekly jobless claims dropping by more-than-expected, reaching their lowest level since mid-May, while retail sales unexpectedly climbed in August. The Treasury curve continued to steepen, with the 10-year Treasury yield rising modestly even after the Fed cut.

Similar to the US, European equity markets saw a strong rally on Thursday in response to the Fed. However, momentum reversed course on Friday wiping out the gains and putting the STOXX 600 modestly lower for the week. Regional indices did however manage to post slight gains, with the UK FTSE 100 as an exception, down 0.5%. UK inflation held at 2.2% in August, however services inflation, a closely watched measure by the Bank of England (BoE), ticked higher, cementing expectations for the central bank to remain on hold. Indeed, on Thursday the Monetary Policy Committee voted 8-1 in favour of maintaining rates, although markets currently expect a cut in November.

Another central bank on hold was the Bank of Japan (BoJ), leaving its short-term interest rate at 0.25%, following on from its July hike that jolted markets. Despite this the BoJ seems likely to hike rates later this year, with this expectation boosted as Japan’s core consumer price index increased 2.8% in August. The yen weakened against the US dollar. It was a holiday shortened week for Chinese equities however they managed to log gains. The Hang Seng surged over 5% and on the mainland the Shanghai Composite was up 1.2%. This was even with the latest economic data continuing to cast doubts over the strength of the economic rebound, with retail sales, fixed asset investment and industrial production all missing expectations. The People’s Bank of China made no changes to its policy, while the Hong Kong Monetary Authority cut rates by 50bps in tandem with the Fed.

Weekly macro highlights

Fed starts easing cycle with 50bps rate cut

On 18 September the US Federal Reserve (Fed) started its monetary easing cycle with a 50bps rate cut, taking the benchmark Federal funds rate to a range of 4.75%-5.0%. Fed Chair Jerome Powell mentioned the FOMC committee had gained confidence that inflation is moving towards the 2% target, but that price pressures remain elevated. He commented that job gains have slowed in recent months and the unemployment rate has moved up, although it remains contained. This decision was accompanied by a more dovish set of economic projections, which showed FOMC members still expect two more rate cuts in 2024 and four cuts in 2025. The document showed that policymakers anticipate that the unemployment rate will increase to 4.4% in 2024 and remain elevated through 2025. Real gross domestic product growth is expected to remain at 2% in the coming years and inflation, measured by the core personal consumption expenditures index, is expected to remain above the target until 2026.

BoE keeps Bank rate on hold

The Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 8 to 1 in favour of keeping Bank rate on hold at 5.0%. This was in line with market expectations. The MPC highlighted its commitment to follow a gradual approach to easing monetary policy following the insufficient evidence from recent economic data that inflationary pressures have faded. BoE officials highlighted that although the inflation trajectory has decelerated, underlying pressures, particularly from services prices, remain elevated. Prices for services increased by 5.6% year-on-year (YoY) in August, while annual headline inflation was up by 2.2% YoY, maintaining the growth pace from the last month. Wage growth, which is also closely followed by the MPC, moderated to 4.9% YoY. Although labour market indicators have deteriorated recently, the unemployment rate remains contained at 4.1%. The BoE also announced plans to reduce holdings of UK government bonds by £100bn over the coming year.

Brazil’s central bank hikes interest rate by 25bps

At the latest Monetary Policy Committee (Copom) meeting on 18 September, officials from Brazil’s central bank voted in favour of raising the Selic rate by 25bps to 10.75%. The decision comes after the start of a policy easing cycle that started in August 2023. The Copom acknowledged that economic activity and labour market indicators have been showing signs of strength, but headline inflation is at 4.24%, close to the top of the target range. Inflation expectations for 2024 and 2025 have increased to 4.4% and 4.0% respectively. The Committee understands that a period of de-anchoring of inflation expectations, together with stronger-than-expected service inflation and a combination of policies that contributed to the depreciation of the Brazilian real, justify the decision to tighten monetary policy. The statement following the decision also mentioned the need for a credible fiscal policy, committed to debt sustainability, that will contribute to anchor inflation expectations going forward.