The first cut is the deepest
US Federal Reserve cuts Fed Funds rate for first time since 2020.
Bank of England choose to keep rates on hold during September meeting.
Crude oil hits two and a half year low.
The UK government passes bill to restrict winter fuel payments to pensioners.
Kamala Harris generally agreed to have won first TV presidential debate vs Donald Trump.
Trump survives a further assassination attempt.
Category four hurricane “Helene” hits Florida, one of the strongest recorded in US history.
Tensions in Middle East rise as Hezbollah leader Hassan Nasrallah killed in an Israeli airstrike.
September lived up to its reputation as a challenging month for equities, as markets had a shaky start amid concerns over a potential US economic slowdown. Signs of softening in the labour market and cooling inflation pointed to an economy that might not need such high interest rates, prompting the US Federal Reserve (Fed) to cut its benchmark rate by 0.5 %. This is the first such move since 2020. Global equity markets found relief on this shift, clawing back early losses. Meanwhile, China unveiled a robust stimulus package, giving Asian markets a powerful tailwind and propelling Chinese stocks to their best weekly performance since 2008.
The magnitude of the Fed’s rate cut surprised some parts of the markets. This was the first cut by America’s central bank since it lifted rates to tackle inflation, and most importantly the shift marks the formal start of a monetary-easing cycle. It also represents a bet that inflation will soon be yesterday’s problem, and that action is required to support the labour market.
When the Fed raised rates between early 2022 and mid-2023, it telegraphed the size of each rise in advance. This time there was uncertainty about how big the reduction would be. A week before the cut, market pricing implied roughly 65% odds that the Fed would cut rates by only 0.25%. That some investors, albeit a minority, were still positioned for a smaller move helps explain why stocks rallied after the Fed opted for a bigger cut.
The argument for a 0.5% cut rests on several pillars. Crucially, the Fed is confident that it is on track to bring inflation under control. Price rises have slowed to an annual pace of 2.5%, not far from its target of 2%. With oil prices sagging and rents rising more slowly, there is a good chance that inflation will soon ease further. Therefore, the Fed’s worries have shifted to the job market. The unemployment rate of 4.2% is low, but nearly a full percentage point higher than early last year and companies have cut back on their hiring. Jerome Powell, the Fed’s chair, portrayed the rate cut as a recalibration of monetary policy in line with a lessening of inflation risks and an increase in unemployment risks. He is trying to maintain the image that this was their plan all along and they are fully in control. If the markets believe him, this could be a very strong period for equities, especially those left behind by the tech rally of the last 18 months.
Mr Powell’s cut is also a form of insurance. It takes months for rate reductions to filter through the economy. Given this lag and given the expectation that the economy will continue to slow, it makes sense for the Fed to make a bigger move now in order to get ahead of the coming weakness. The central bank was late in raising rates in 2022. This time, it hopes that starting with a bigger cut will steer the economy towards a soft landing, avoiding the recession which many analysts once thought inevitable. “We don’t think we’re behind,” said Mr Powell. “We think this is timely. But I think you can take this as sign of our commitment not to get behind.”
Coming just before the presidential election, the big rate cut may attract criticism from Donald Trump, fresh from a further assassination attempt. He could see this as a sign that the Fed, a frequent target of his ire, is trying to help Kamala Harris. Yet a quarter-point cut could just as easily have invited a complaint from Democrats that Mr Powell had been intimidated by Mr Trump. Mr Powell has long said that he tunes out the political noise. During the month Trump and Harris had their first ever face-to-face meeting for a presidential debate. The meeting came nearly two months after President Joe Biden’s dismal performance in his debate with Donald Trump in June forced him to end his re-election bid and back Harris for the presidency. Consensus has been that Kamala won the debate.
The Fed’s rate cut, along with hopes for additional easing, pushed bond prices higher. Fixed-coupon bonds became more attractive to income-oriented investors as cash rates softened. Bond-proxy sectors, like utilities and real estate, also gained. The Bank of England held rates steady, citing persistent wage inflation. This likely weighed on UK government bond performance as 10-year gilt yields stayed around 4% throughout September. Sterling’s higher yield contributed to a 2% decline in the US dollar relative to the pound.
Global equity markets ended September close to where they started, though regional performance diverged. Asian markets led gains, buoyed by China’s substantial new stimulus package. While Beijing had introduced various support measures over the past year, such as interest rate cuts and lower downpayment requirements, the September announcement was notably comprehensive. It signalled a strong commitment to stabilising the economy and supporting markets. Meanwhile, UK equities lagged, with many commentators attributing this to pre-emptive selling ahead of October’s Autumn Budget. The FTSE All Share Index slipped 1.3%.
Elsewhere, oil prices hit their lowest level in over two and a half years, even amid heightened tensions in the Middle East between Israel and Hezbollah. Investor focus appears to have shifted toward concerns over declining demand due to a potential global slowdown, coupled with Saudi Arabia’s decision to maintain supply levels as it seeks to expand its market share.
As we move into the final quarter of 2024, it’s clear the market's concern over inflation is now fading into the background. The focus has shifted to the overall health of the economy. In our view, the most likely scenario remains a soft landing, an economy that is slowing but continues to grow. Inflation is coming down, and while the unemployment rate has ticked up, we see this as more of a reflection of an expanding labour force than a sign of trouble. We believe this is part of a healthy normalisation process, rather than a reason for alarm.
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