A Look Ahead: U.S. and Global Markets with Mike Dolan
Today’s main event is the Federal Reserve’s anticipated interest rate cut and its potential impact on markets. With Wall Street’s S&P 500 hitting a new intraday record on Tuesday, investors are eagerly awaiting the Fed’s decision, which is expected to be the first in the current easing cycle. The market remains optimistic about lower borrowing costs despite a strengthening economy, with stock futures holding steady as the big decision looms.
Recent economic data has been unexpectedly strong. Retail sales rose again in August, and factory output exceeded forecasts, defying some recent negative manufacturer surveys. As a result, the Atlanta Fed’s ‘GDPNow’ model has increased its third-quarter growth estimate to 3%, matching the previous quarter’s pace.
Despite the economic positivity, futures are leaning toward a 50 basis point rate cut rather than the more typical 25 basis points. The probability of a larger cut stands at around 60%. Claudia Sahm, a former Fed economist, supports a larger cut, arguing that it’s necessary to prevent job losses and achieve the Fed’s dual mandate of maximum employment and price stability.
Historically, stock markets tend to perform well after the first Fed rate cut. The average one-year return is about 5% even during recessions and more than 16% when no recession follows the cut. However, markets might react negatively if the Fed opts for a smaller cut than anticipated.
Investors will also scrutinize the Fed’s ‘dot plot’ for future rate projections, which could indicate the central bank’s stance on further easing and the economic outlook. Any signs of disagreement among policymakers or adjustments to the long-term neutral rate estimate will be closely watched.
In the meantime, the Treasury market has become more cautious, with the two-year yields reflecting the uncertainty.
