Quarterly Outlook
Q3 Investor Outlook: Beyond American shores – why diversification is your strongest ally
Jacob Falkencrone
Global Head of Investment Strategy
Access both platforms from your single Saxo account.
London Quick Take – 18 September – Bank of England to stand pat after Fed cut - what next for markets?
Neil Wilson
Investor Content Strategist
Note: This is marketing material. This article is not investment advice, capital is at risk.
Remember, while the NFP headline numbers have broken down, the year’s payrolls to March revised down 991k, and weekly unemployment claims climbed, the breakeven for payrolls has also drastically altered. The St Louis Fed estimate that the breakeven number of jobs that the US economy must create each month for unemployment to remain steady has come down from 155,000 in April to a range of 32,000-82,000, driven almost entirely by a large reduction in net migration.
And so, unemployment projections are unchanged for this year at 4.5%, the same as in June, while they are seen lower in 2026 and 2027 than previously. The growth rate is revised higher this for this year and the following two! Inflation next year is forecast to be higher than it was predicted in June.
It should be noted that the Fed left its unemployment expectations unchanged this year, while lowering them for the next two years, revised growth higher the next three years and revised inflation upwards next year, and said unemployment remains low...and still cut rates, while lower the median dot for this year to 3.6 from 3.9?!
This is already fiscal dominance in action, which means higher inflation, and is good for gold and bad for USD and long-dated Treasuries. It's gonna be a more mixed picture for stocks.
So many questions – why cut against lower unemployment? Why a risk management cut whilst predicting several more cuts?
The market didn’t know exactly what to make of this – the dollar rallied hard after the initial selloff, whilst Wall Street ended mixed. Treasury yields and gold declined.
But if you want to know why stocks didn't surge and the 10yr didn't climb above 4% then it's because the move was already fully discounted. The next moves are less certain.
Bank of England
Sterling comes into today’s BoE meeting after a big figure move post the Fed with GBPUSD hitting a high above 1.37 before retaking a 1.35 handle, where it’s found some support to nudge back across 1.36 this morning.
The Bank of England is also in a tricky spot as employment weakens but inflation remains higher and more persistent. Having cut in August it’s in no rush to do so again and expected to leave rates unchanged on Thursday, preferring to wait and see on the incoming data and what happens with the Budget. With the chancellor pushing the date for the fiscal event out to November 26th, many now think the next possible cut by the BoE cannot come until the December meeting, slightly stretching out the cadence of roughly quarterly rate cuts that’s widely expected.
Ahead of the BoE this week’s inflation data remained well above target at 3.8%, albeit services inflation did cool from 5% to 4.7%. However, there is a lot of data between now and the 6 November MPC meeting that could mean the BoE does cut again before the Budget.
A complicating factor for the BoE is the rise in debt interest costs. Gilt yields have hit 27-year highs since the August meeting and a Budget of great importance looms. The question for gilts and sterling is less about the immediate policy decision but whether the Bank continues with its quantitative tightening programme. I looked at this earlier this month. It ought to be something it is actively looking at, but we might need to wait until December for any real shift on rates but we could see the BoE slow QT to help out Rachel Reeves. I would stick to my view stated over the last couple of meetings that the BoE is likely to move more slowly but ultimately cut deeper.
Elsewhere...
Key Points
- Fed cuts rates by 25bps as expected
- Bank of England expected to hold rates steady today
- Next shares slide, Pets at Home tumble on CEO exit and profit downgrade
- Wall St ends mixed with tech under pressure, European shares rise
So, the Fed cut rates. So, at least that is out of the way, kind of. I don’t think we know awful lot more than we did before – the market didn’t quite know how to take it. But it does seem the priority is the labour market; inflation will be allowed to run a little higher (as I’ve been saying for the last five years), and policymakers are not entirely (the caveat is important) throwing in the towel to the administration, albeit the cut does still look largely political for my money given the forecasts.
It was the pivot, as expected, but maybe on a much bigger scale than the narrow market reactions imply: it is hard to come away from this meeting without sensing we have entered a new era of fiscal dominance with rates kept artificially low to offset record borrowing.
Chair Powell pulled off a bit of a Jedi mind trick. “This is not the meeting you are looking for”, he seemed to tell markets, saying it was a “risk management” cut - having just delivered a rate cut despite unemployment forecast to remain steady and low, growth to pick up and inflation to rise. Everything the market’s stormtroopers wanted was there in front of them, but Powell managed to somehow deflect attention. The fact Waller and Bowman didn’t also dissent maybe helped Powell out. The fact the committee didn't seem to fall in behind the doves with their dot plots helped to soothe bond markets. But the market saw the dot plot and statement as pretty dovish, with the dollar plunging at 2pm eastern time yesterday before snapping before during and after the press conference with Powell. Stocks also ended mixed with the Dow Jones up for the day as financials rallied on yield curve action and big tech fell to push the broader S&P 500 down; but the trick is wearing off – US futures are rising this morning after Tokyo hit a fresh high overnight and European shares have opened higher.
We should talk jobs. Just how much things have changed in the last few weeks...at least in terms of optics. In the July 30th statement, the FOMC said: “The unemployment rate remains low, and labor market conditions remain solid. Inflation remains somewhat elevated.” Now it says “the unemployment rate has edged up but remains low”.
It was the pivot, as expected, but maybe on a much bigger scale than the narrow market reactions imply: it is hard to come away from this meeting without sensing we have entered a new era of fiscal dominance with rates kept artificially low to offset record borrowing.
Chair Powell pulled off a bit of a Jedi mind trick. “This is not the meeting you are looking for”, he seemed to tell markets, saying it was a “risk management” cut - having just delivered a rate cut despite unemployment forecast to remain steady and low, growth to pick up and inflation to rise. Everything the market’s stormtroopers wanted was there in front of them, but Powell managed to somehow deflect attention. The fact Waller and Bowman didn’t also dissent maybe helped Powell out. The fact the committee didn't seem to fall in behind the doves with their dot plots helped to soothe bond markets. But the market saw the dot plot and statement as pretty dovish, with the dollar plunging at 2pm eastern time yesterday before snapping before during and after the press conference with Powell. Stocks also ended mixed with the Dow Jones up for the day as financials rallied on yield curve action and big tech fell to push the broader S&P 500 down; but the trick is wearing off – US futures are rising this morning after Tokyo hit a fresh high overnight and European shares have opened higher.
We should talk jobs. Just how much things have changed in the last few weeks...at least in terms of optics. In the July 30th statement, the FOMC said: “The unemployment rate remains low, and labor market conditions remain solid. Inflation remains somewhat elevated.” Now it says “the unemployment rate has edged up but remains low”.
Remember, while the NFP headline numbers have broken down, the year’s payrolls to March revised down 991k, and weekly unemployment claims climbed, the breakeven for payrolls has also drastically altered. The St Louis Fed estimate that the breakeven number of jobs that the US economy must create each month for unemployment to remain steady has come down from 155,000 in April to a range of 32,000-82,000, driven almost entirely by a large reduction in net migration.
And so, unemployment projections are unchanged for this year at 4.5%, the same as in June, while they are seen lower in 2026 and 2027 than previously. The growth rate is revised higher this for this year and the following two! Inflation next year is forecast to be higher than it was predicted in June.
It should be noted that the Fed left its unemployment expectations unchanged this year, while lowering them for the next two years, revised growth higher the next three years and revised inflation upwards next year, and said unemployment remains low...and still cut rates, while lower the median dot for this year to 3.6 from 3.9?!
This is already fiscal dominance in action, which means higher inflation, and is good for gold and bad for USD and long-dated Treasuries. It's gonna be a more mixed picture for stocks.
So many questions – why cut against lower unemployment? Why a risk management cut whilst predicting several more cuts?
The market didn’t know exactly what to make of this – the dollar rallied hard after the initial selloff, whilst Wall Street ended mixed. Treasury yields and gold declined.
But if you want to know why stocks didn't surge and the 10yr didn't climb above 4% then it's because the move was already fully discounted. The next moves are less certain.
Bank of England
Sterling comes into today’s BoE meeting after a big figure move post the Fed with GBPUSD hitting a high above 1.37 before retaking a 1.35 handle, where it’s found some support to nudge back across 1.36 this morning.
The Bank of England is also in a tricky spot as employment weakens but inflation remains higher and more persistent. Having cut in August it’s in no rush to do so again and expected to leave rates unchanged on Thursday, preferring to wait and see on the incoming data and what happens with the Budget. With the chancellor pushing the date for the fiscal event out to November 26th, many now think the next possible cut by the BoE cannot come until the December meeting, slightly stretching out the cadence of roughly quarterly rate cuts that’s widely expected.
Ahead of the BoE this week’s inflation data remained well above target at 3.8%, albeit services inflation did cool from 5% to 4.7%. However, there is a lot of data between now and the 6 November MPC meeting that could mean the BoE does cut again before the Budget.
A complicating factor for the BoE is the rise in debt interest costs. Gilt yields have hit 27-year highs since the August meeting and a Budget of great importance looms. The question for gilts and sterling is less about the immediate policy decision but whether the Bank continues with its quantitative tightening programme. I looked at this earlier this month. It ought to be something it is actively looking at, but we might need to wait until December for any real shift on rates but we could see the BoE slow QT to help out Rachel Reeves. I would stick to my view stated over the last couple of meetings that the BoE is likely to move more slowly but ultimately cut deeper.
Elsewhere...
Next shares fell sharply after its cautious outlook. It's always incredibly cautious and always executes incredibly well. But maybe the market was angling for another upgrade.
Nvidia took a knock on reports it could be frozen out of China - this is all tied up with the big power politics and trade deals so expect this story to evolve.
Woof! Pets at Home shares tumbled 22% after it announced the sudden departure of its CEO and warned profits would be in the range of £90mn-£100mn for the year, well below the £115mn expected. Investors scolding this one like a naughty puppy that's done its business where it oughtn't.
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