The world’s most influential Central Bank, the US Federal Reserve, cut rates by 0.5% at its September FOMC meeting on Wednesday, its first interest rate cut since March 2020. The rate now stands at 5.00%, having peaked at 5.50%, up from 0.25% in January 2022. Expectations had bounced between a 25bps cut and a 50bps cut in the preceding weeks, with economists’ consensus indicating a 25bps cut while the market was pricing in closer to 50bps. Federal Reserve Chair Jerome Powell was keen to emphasise in his remarks following the announcement that the magnitude of the cut was not because recession risks had become elevated, rather that the economy was on the path to a soft landing and they wanted to be sure to maintain this trajectory. He also made it clear that 50bps was more of a catch up having not cut in July, and that this pace of cutting was not to be expected to continue.

Market reaction on the day was fairly muted, with initial gains upon the announcement of the cut reversed by the end of Powell’s press conference. Investors apparently needed a night to sleep on the news, and the following day, the S&P 500 and Nasdaq Composite both surged to new highs. The S&P 500 gained 0.41% on the week (price return in sterling terms) as the index rallied but the US Dollar fell against most major currencies. Gains were broad based, although with cyclical sectors such as energy, communication services and financials outperforming while defensives, including real estate and consumer staples, lagged.

Elsewhere, UK, European and Japanese indices fell during the week. The FTSE 100 declined -0.52% (price return in sterling terms), the Japanese Nikkei 225 fell -0.54% and the MSCI Europe ex UK index retreated -0.95%. Japanese equities actually gained in local currency terms, but the Bank of Japan’s decision to leave rates unchanged on Friday weighed heavily on the Yen, which fell -3.5% against the pound during the week. In other markets, oil was a major winner during the week, as Brent Crude rebounded to $73.93 a barrel, from a recent trough of $68.75. US Treasury yields rose modestly during the week, to 3.74% from 3.65%.

Week Ahead

Source: Refinitiv Workspace, 23/09/24

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