Macro Insights: Fed pause playbook Macro Insights: Fed pause playbook Macro Insights: Fed pause playbook

Macro Insights: Fed pause playbook

Macro 5 minutes to read
Charu Chanana

Head of FX Strategy

Summary:  The Fed raised rates by 25bps at the July meeting, and Chair Powell has stayed away from pre-committing any further rate hikes and adopted a data-dependent approach. Markets may view this as a potential end to the Fed’s tightening cycle unless labor market conditions deteriorate. As bond yields fall, there is scope for the valuation laggards of the equity market to catch up. Energy, REITs and renewables may be of interest, but Q4 could bring risks of reflation and recession.

No surprises from the FOMC. A 25bps rate hike to bring interest rates to 5.25-5.50% with a statement that was more or less unchanged from June. Even as Fed Chair Powell tried to keep the case for a September rate hike alive, data-dependency was emphasized far more at the July meeting. We will get two CPI reports and two non-farm payroll reports before the next Fed meeting on September 19-20.

What might the data suggest?

Disinflationary theme has been ruling the markets for now. There are reasons to believe it could be disrupted with base effects weakening in H2. But the Fed will potentially account for that.

As for the labor market, the loosening so far has not been enough to suggest a need for rate cuts, but tracking the unemployment data from here will be far more important to understand when the cycle can turn. Powell noted that full effects of tightening are yet to be felt. He still does not expect inflation to come back to 2% until 2025, but mentioned that if we see inflation coming down credibly, the Fed could move down to a neutral rate level and then below neutral at some point, albeit he pushed back on any rate cuts this year.

Overall, disinflation may not prompt more rate hikes and labor data may not warrant a rate cut, and this suggests we could be in for higher-for-longer interest rates or an extended pause.

What could this mean for investors?

Unless economic data worsens, there may be reasons for the equity market to continue its multiple expansion-driven gains that drove much of the H1 rally. As bond yields fall, there will be the scope for the valuation laggards to catch up. This points to a rotation in equities after much of the H1 gains have been driven by top seven or eight stocks.

Equity sector rotation has been gaining momentum last few weeks, as is evident with gains in DJIA (+3.2%) and Russell 2000 (+4.85%) so far this month outpacing those in S&P 500 (+2.6%) and NASDAQ 100 (+2.1%). While Big Tech earnings have mostly met expectations as of now, investors are looking to find cheaper equity sectors to participate in the rally. This brings up the Energy sector which is the cheapest in the S&P 500 and is regaining traction with the repricing of the US economic risks lower, China stimulus announcements and supply threats. Energy companies are also expanding investments again after years of underinvestment.

A lasting rate pause could also boost the housing sector as it effectively puts a cap on mortgage rates. REITs are particularly interesting in times when economic conditions are strong but central banks are not raising rates. We discussed about the opportunities in REITs in this video. Renewables and electric vehicles are also back on the radar of investors with interest rates reaching a peak, and we expect the risk/reward to be favourable in different parts of the value chain, including battery manufacturers, battery suppliers or charging networks. Our video on EVs discusses stocks and ETFs to get exposure to ride the EV boom. Emerging markets could also get a leg of support from Fed’s pause as they get the room to cut rates ahead of the Fed given faster disinflation, weak demand and higher real rates.

Other considerations for investors

Figure 1: Energy being a key driver of recent US disinflation. Source: Bloomberg, Saxo

Inflation risks cannot be completely discounted, given the rally in commodities is returning and that can bring back goods inflation which has been the major driver of disinflation so far. Real rates will continue to rise from here, either if Fed trajectory gets repriced higher on inflation risks returning. Passive tightening, or the rise in real yields even as nominal yields remain unchanged, is also likely due to the effects of lower inflation. That makes it hard for the valuation driven rally to continue unless equity risk premium is repriced significantly lower. Sentiment and positioning in equities also appears stretched and could be a reason to be cautious.

Figure 2: US real rates (nominal rates minus headline inflation) on an upswing. Source: Bloomberg, Saxo

A Fed pause can also signal a countdown to a recession. There are many risks to keep a watch on, particularly the worsening credit conditions and delinquencies. Q4 growth could see an impact from that, together with a goods reflation and weakness in Europe and China. Adding some duration in fixed income may help investors diversify the risks and navigate a potential recession as well as uncertainty around the Fed’s policy trajectory. If recession risks materialize, long-term US Treasuries will have a more significant upside potential due to their high duration. Gold, which could still remain challenged in the near-term due to the rising real rates (stable nominal rates and decline in inflation) could be of interest again in Q4 if recession concerns accelerate and markets start to bring forward the pricing for Fed’s rate cuts.

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 07

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article
  • The rise of populism: Far-right parties will influence the future

    The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.

    Read article
  • Investing in China: Navigating Q1 amid economic challenges

    Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.

    Read article

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (
- Full disclaimer (

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.