Market Quote: Is the Fed Finally on the Cusp of a Rate Cut?
Author: The editor's desk
August 1, 2024
A mid-week analysis of what’s happening in global financial markets from the perspective of AGF’s investment management team.
When Doves Cry
The U.S Federal Reserve (Fed) left interest rates unchanged as expected on Wednesday, but market participants may not have been fully expecting Fed Chair Jerome Powell’s candid openness to a potential rate cut in September. In fact, the official Fed statement was much more hawkish than Powell’s more dovish press conference, in which he clearly telegraphed the possibility of one or more cuts by the end of the year.
U.S. bond yields hit new multi-month lows following Powell’s comments, while U.S. equity markets also reacted positively, marking a bounce back of sorts from the significant volatility earlier this week, which was highlighted by a significant rotation away from growthier large capitalization technology stocks towards more value-oriented and/or smaller capitalization stocks.
Meanwhile, second quarter U.S. earnings results have so far been decently positive, with many areas outside of the technology sector surprising to the upside.
Bank Roll
Second quarter U.S. bank earnings have been solid to date, with 80% of those reporting beating analyst estimates and only 13% missing expectations. Anticipated rate cuts could be beneficial for the sector going forward if it provides some measure of deposit cost relief that outweighs any contraction in loan yields, while also bolstering loan demand and improving credit quality.
Still, the benefit of rate cuts may come with a caveat. While potentially positive to earnings in the initial stages, a protracted rate cutting cycle has usually coincided in the past with economic recession, which is far from the ideal backdrop needed to drive bank profitability higher.
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