Market Quote: Fed Cuts Rates by 50 Basis Points
Author: The editor's desk
September 19, 2024
A mid-week analysis of what’s happening in global financial markets from the perspective of AGF’s investment management team.
Big Bang
The U.S. Federal Reserve (Fed) elected to start its easing cycle with a bang, delivering a 50-basis point (0.5%) rate cut in a nod to increasing concerns about the trajectory of employment. However, economic forecasts remained largely in line with prior levels, with inflation tweaked modestly lower, unemployment slightly higher and GDP growth unchanged at a solid pace.
In addition, the economic projections indicated that the future pace of rate cuts was probably in 25-basis-point increments, and Fed Chair Jerome Powell indicated that no one should infer a 50-basis point rate cut pace going forward.
U.S. financial markets initially reacted favourably, with bond yields declining, credit spreads tightening, and equities (particularly cyclicals and small caps) and gold rallying. However, markets subsequently trimmed those gains as the news was digested, potentially reflecting profit-taking following a strong rally over the previous week and a half.
Stick the Landing
It looks like the Fed may be able to stick a soft landing similar to what we saw back in 2019. Cross-asset price action remains generally strong and will likely continue to be quite positive as the Fed adds fuel to a still fairly healthy U.S. economy.
In my opinion, the only real obstacle to a bullish fourth quarter in U.S. financial markets is the U.S. election, which remains a potential risk to investors.
Volatility Ahead
The U.S. equity market reaction to the Fed’s 50-basis point interest rate cut was decidedly mixed. The S&P 500 Index closed down slightly on the day, with cyclical sectors such as Energy, Industrials and small capitalization stocks outperforming, while defensive sectors like Utilities and Consumer Staples lagged as the larger cut provides more confidence that the economy can achieve a soft landing and avoid recession.
This is a notable reversal compared to year-to-date S&P 500 Index performance whereby Utilities have been the best performing sector and Energy the worst. Equities typically rally following the first rate cut if no recession occurs, but we expect markets to remain volatile in the near term as investors digest this cut along with upcoming corporate earnings and continued economic data heading into November’s U.S. election.
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Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. Our companies deliver excellence in investing in the public and private markets through three business lines: AGF Investments, AGF Capital Partners and AGF Private Wealth.
AGF brings a disciplined approach, focused on incorporating sound, responsible and sustainable corporate practices. The firm’s collective investment expertise, driven by its fundamental, quantitative and private investing capabilities, extends globally to a wide range of clients, from financial advisors and their clients to high-net worth and institutional investors including pension plans, corporate plans, sovereign wealth funds, endowments and foundations.
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