Stocks above Fed’s rapid ‘recalibration’, BoE follows Reuters

A look at the day ahead in US and global markets from Mike Dolan

After a typically angry first-day reaction, global markets are embracing the Federal Reserve’s new stance on Thursday as assurance of the holy grail of an economic soft landing.

Fed chief Jerome Powell described Wednesday’s huge half-point interest rate cut as a “recalibration” rather than a panic emergency, and investors are taking the move as a sign the Fed will quickly seek that new ” neutral’ without necessarily being forced to do so. a weakening economy.

There was only one dissenter — Fed Governor Michelle Bowman — who clearly felt the economy only needed a quarter-point cut.

All in all, this is exactly the balance the stock market has been praying for all year. And even though Wall Street has returned to the close, futures are up 1-2% again to new highs before the bell today.

Treasuries appear comfortable that they priced it all in up front, with two-year yields nearing two-year lows just below 3.6% on Thursday and the spread of the 2- to 10-year yield curve widening to 10 basis points basic – the most positive. from mid-2022.

The greenback briefly set a new low for the year after the Fed tapering, but has since stabilized, with USD/JPY moving ahead of the Bank of Japan’s latest decision on Friday. Sterling hit its best level in 30 months as the Bank of England is expected to deliver another rate cut later today.

Shifting the focus from inflation to the labor market, Powell and colleagues — through his press conference and updated Fed economic and rate forecasts — signaled another 50 basis points of easing by the end of the year and another 100 basis points of basis in 2025.

Cutting inflation forecasts to within a tenth of a percentage point of the Fed’s 2 percent target next year and pushing the unemployment rate to 4.4 percent set the stage for a return to what officials now see as a long-term neutral rate.

And even though they raised that “long-term” rate by a tenth to 2.9%, they expect to get there by 2026 – about 200bps lower than the new policy rate of 4.75-5, 00%

Even though the Fed has hinted at another 50 basis points of cuts in its two remaining meetings this year, futures have priced in more than 70 basis points — and nearly 200 basis points of cuts so far this year future.

Bank of America, for one, now sees 75bp cuts by the end of the year – arguing that the focus on holding ahead of any labor market weakness could see the Fed “pushed into deeper cuts”.

With jobs data highly sensitive from here on out, Thursday’s weekly jobless claims numbers will be a first test.

On the other hand, Wednesday’s big cut underscores what appears to be a recovering housing market that should support the ongoing expansion — running at about 3 percent in the current quarter. As 30-year fixed mortgage rates have now fallen to a two-year low of 6.15 percent, housing starts rose more than 15 percent last month.

In financial markets, the rule of thumb is that when the Fed has previously started to cut interest rates in an ongoing economic expansion, stocks gain on average more than 16% over the next year – led by both stocks with large-cap as well as small-cap growth stocks.

Small-cap index futures rose nearly 3 percent ahead of Thursday’s open.

As U.S. futures were breaking on Thursday, global stocks recovered broadly in the slipstream. The benchmark index in Tokyo and Hong Kong rose 2%, the former flattered by the retreating yen and the latter by a cut in the lock rate from the HK monetary authority.

Chinese shares also rose on hopes that the Fed’s move would give Beijing policymakers room to relax as soon as Friday – helped by a strengthening to their best levels since May last year.

European shares also rose 1%.

Elsewhere, the Fed’s easing error was less infectious.

Even though the BoE is expected to delay a second UK interest rate cut until November on Thursday, it will update on the ongoing balance sheet reduction process.

If it repeats previous years’ targets of a £100bn outflow next year, that could sharply curtail the BoE’s active bond sales, as a tough debt maturity program over that horizon will lead to an organic decline in bonds in the next 12 months.

Norway also held the line, with its central bank leaving rates unchanged at 4.5% on Thursday. And Brazil went in the opposite direction and raised rates for the first time in two years on Wednesday.

Key developments that should provide more direction for US markets later on Thursday:

* Bank of England policy decision, meeting minutes and annual balance sheet target; The Reserve Bank of South Africa and the Central Bank of Turkey make policy decisions

* US weekly jobless claims, September Philadelphia Fed business survey, August existing home sales, T2 current account

* Isabel Schnabel, member of the board of the European Central Bank, speaks

* The US Treasury sells 10-year inflation-protected securities

* US company earnings: FedEx (NYSE: ), Lennar (NYSE: ), Darden Restaurants (NYSE: ), Factset

(By Mike Dolan; Editing by Christina Fincher; [email protected])