Global Market Quick Take: Europe – 19 September 2024

Key points:

• Equities: Futures are indicating a strong open after the Fed’s 50 bps cut
• Currencies: Yen in focus as dollar reverses some of its post-FOMC gains
• Commodities: Gold consolidating near record
• Fixed Income: Treasury Gains Reversed After Fed's 50bp Cut
• Economic data: Bank of England and Norges Bank rate decisions

The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.

In the news: Fed starts rate-cut cycle with jumbo cut, but pace of cuts ahead likely slower (Investing), Bank of England set to hold rates with bond sales in spotlight (Investing), Fed's Powell says balance sheet drawdown continues amid rate cuts (Investing), Intel finally gives Wall Street good news (Yahoo), Fed 'dot plot' suggests central bank will slash interest rates two more times in 2024 after mega 50 basis point cut (Yahoo), Ray Dalio says the Fed has a tough balancing act as the economy faces ‘enormous amount of debt’ (CNBC)

Macro:

• The FOMC cut rates by 50bps, taking the target for the federal funds rate to 4.75-5.00%. This came as a dovish surprise as markers had only priced in a 50bps move with 60% probability. The dot plot showed 2024 median rate forecast was revised down to 4.4% from 5.1%, which implies a further 50bps of easing from current levels. An additional 100bps of easing has been indicated for 2025 with the median long-term neutral rate higher once again at 2.875% from 2.75% in June but with higher dispersion in the dots.
• However, one dissenter to the vote and Chair Powell’s press conference took away some of the dovish impact. Governor Bowman opted to vote for a smaller 25bp rate reduction. Fed Chair Powell used the press conference to stress that the Fed is not on a pre-set path and that no one should think that this is the new pace. He said that decisions will be taken on a meeting-by-meeting basis, noting the Fed can go quicker or slower, or even pause if it is appropriate. Powell remained upbeat on the economy despite signs of loosening labor market, indicating that the bigger rate cut comes from a position of strength. The clear message is that achieving a soft landing remains the Fed’s key objective and limited forward guidance will mean that markets remain volatile.
• UK’s August inflation came in-line with expectations with the headline unchanged at 2.2% YoY but services rising to 5.6% YoY from 5.2% in July. The Bank of England decision is due today and there is unlikely to be any change in interest rates. However, the market is pricing in 50bps of rate cuts through to the end of the year and the central bank expects a pickup in headline inflation as well later in the year. This could make the BOE’s tone today to be one of a pushback to market expectations.
• Australia’s unemployment rate remained steady in August at 4.2% with data from its Bureau of Statistics (ABS) showing the labour market is still operating very close to recent historical tightness, with the participation rate at a record high 67.1%. Something the RBA would like to see loosen - before cutting rates - in order to bring the economy back into better balance and inflation is under control. As a result, the bond market lowered the prospect of a rate cut before yearend from 85% to 70%.

Macro events (times in GMT): Norges Bank exp unchanged at 4.5% (0800), Bank of England exp unchanged at 5% (1100), US Initial Jobless Claims (w/e 14th Aug), Philadelphia Fed (Sep) exp 0 vs –7 prior (1230), Initial Jobless Claims exp 230k vs 230k prior (1230), Existing Home Sales (Aug) exp 3-9m vs 3.95m prior (1400), EIA’s Natural Gas Storage Change exp 55bcf vs 40 bcf prior (1430)

Earnings events: General Mills reaffirmed its FY25 outlook yesterday while reporting a better-than-expected organic revenue growth rate than expected, but investors were still not satisfied sending shares lower. Today’s key focus is on US homebuilder Lennar reporting after the US market close.

• Tuesday: Ferguson Enterprises
• Wednesday: Vantage Towers, General Mills
• Thursday: FedEx, Lennar, Darden Restaurants, Next, FactSet Research Systems

For all macro, earnings, and dividend events check Saxo’s calendar.

Equities: The Fed voted to cut its policy rate by 50 bps last night with voting member Michelle Bowman casting a dissenting vote in favour of a 25 bps cut. Equities liked initially the Fed’s move, the S&P 500 Index ended the session lower. But overnight the mood has changed with futures now indicating 1.1% higher open in the US and 1% higher open in Europe. The Fed’s move also eased pain in currency markets lifting Japanese equities by 2%. Powell sounded confident about the move saying that he did not think the Fed is behind the curve and that the labour market is actually in solid condition. Given those remarks it is a bit of a surprise for the Fed to aggressively with the set of conditions in front of them. In any case, the Fed’s rate cut cycle has now started and the speed of descent will now depend on incoming data on the US economy. On a sector level, the sectors that did the best relatively were the energy and communication services sectors while utilities and IT sectors were the worst, which seems like a strange market reaction. T-Mobile and BlackRock shares were among the most actively traded stocks yesterday with T-Mobile announcing an upbeat EBITDA outlook by 2027 and BlackRock announcing a $30bn AI infrastructure fund with Microsoft.

Fixed Income: Following yesterday's FOMC meeting, U.S. Treasuries initially rallied after the Fed's 50 basis point rate cut. However, those gains reversed during Powell's press conference, where he indicated that further large cuts were unlikely and expressed confidence in the strength of the economy. The yield curve steepened, with front-end yields rising slightly and longer-dated yields increasing by 2-6 basis points. Traders are now pricing in around 70 basis points of additional cuts for the rest of the year, anticipating at least one more significant move, while the Dot Plot indicates another 50 basis points of cuts for the year. Yields ended higher across maturities as the policy response does not align with current economic conditions. The long end of the yield curve underperformed, with 10-year yields trading too rich compared to the expected neutral long-term rate of 3%. Ahead of the Federal Reserve meeting, European sovereign bonds sold off, with German 10-year yields rising by 5 basis points to 2.19%, their highest level in over a week. Italian and French 10-year spreads over Germany widened slightly by 3 basis points and 1 basis point, respectively. Meanwhile, UK 10-year gilt yields climbed 8 basis points, the largest daily rise since August, as traders reduced their expectations of Bank of England rate cuts, following elevated inflation data from the UK. Click here for a preview to today’s BOE monetary policy decision.

Commodities: Gold rose to a record high only to pull back after the FOMC signaled policymakers are in no rush to aggressively lower interest rates following Wednesday’s 50 basis point cut. Overall, the market was ripe for consolidation, having rallied strongly ahead of the meeting, but the prospect of lower funding costs in the coming months will likely provide an additional layer of support on top of those that have seen gold become a star performer this year. Following a post-FOMC pull back, silver has risen to once again challenge resistance in the USD 31 area, while copper is currently breaking higher through USD 4.30, supported by the US rate cut and some signs of a pick-up in Chinese metals markets. Note, China is widely expected to trim its main policy and benchmark lending rates on Friday. Crude oil trades steady with geopolitical risks, weakening US gasoline and jet fuel demand, and a US rate cut, all creating a challenging environment, leaving traders guessing what the current fair value for a barrel is. Brent has steadied above USD 70 but has yet to challenge key resistance at the USD 75 level, a break above which may trigger short covering from funds.

FX: The forex markets saw choppy trading with the US dollar slipping significantly initially on the Fed’s jumbo rate cut but retracing the losses quickly after as the vote split and Powell’s comments weakened the dovish impact. In early Asian morning, the US dollar continues to trade higher, with Japanese yen weakening past the 143 level against the USD for the first time in ten days. Focus will turn to Bank of Japan announcement due on Friday where plans for further hiking could bring another leg of support for the yen. Kiwi dollar and British pound outperformed despite USD gains, given the extensive emphasis on a soft-landing target, and the latter faces its central bank decision due which could further reaffirm its resilience. Australian dollar rose after a robust jobs report saw the bond market lower the chance of a rate cut before yearend to 70% from 85%.

Volatility: Volatility edged up, with the VIX rising to 18.23 (+3.52%). Equity futures are showing positive momentum this morning, with the S&P 500 up 0.98%, Nasdaq 100 up 1.43%, and Russell 2000 gaining 1.46%. Yesterday, the Fed announced a 50 basis point rate cut, which was larger than expected. Markets were initially volatile but did not overreact, suggesting they are still digesting the implications of the decision. Expected moves derived from options pricing indicate the S&P 500 could shift up or down by around 48 points (~0.85%) today, while the Nasdaq 100 might see a movement of about 231 points (~1.19%). On the economic front, initial jobless claims are expected to come in at 230K, and the Philadelphia Fed Manufacturing Index is forecasted to slightly improve to -0.8. Later today, existing home sales data will be released, with expectations set at 3.92M. FedEx (FDX) is reporting earnings today, with an anticipated EPS of 4.86 and revenue of $21.96B. Yesterday's most active stock options included Nvidia, Tesla, Apple, Broadcom, Intel, and Amazon. Expect more market volatility today as investors continue to process the Fed’s unexpected rate cut.

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