A trader works on the trading floor of the New York Stock Exchange on August 23, 2024.
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Central banks around the world will begin or continue to cut interest rates this fall, ending an era of historically high borrowing costs.
In September, the Fed will almost certainly join the European Central Bank, Bank of England, People's Bank of China, Swiss National Bank, Sweden's Riksbank and Bank of Canada. bank of mexico and others slashed key interest rates, which had been held at levels not seen before the 2007-2008 financial crisis.
Money markets have fully priced in the impact of the Federal Reserve's interest rate cuts, but last week investors became more confident about future easing policies.
At the annual Jackson Hole symposium, Fed Chairman Powell not only said that “the time has come to adjust policy,” but that the central bank can now equally focus on “doing whatever it takes” to keep the labor market strong and continue to make progress on inflation. swell.
According to CME's FedWatch tool, current pricing suggests high expectations for the Fed to cut rates by 25 basis points three times before the end of the year. Although the Fed acted late, it would put the Fed broadly in line with other central banks.
The European Central Bank is expected to cut interest rates by 25 basis points at least three times this year; the Bank of England is expected to increase rates by the same amount, tripling in total, according to London Stock Exchange Group data. Although the stickiness of service sector inflation continues to trouble policymakers, all three major central banks are expected to further continue to implement monetary easing policies at least in early 2025.
For the global economy, this means a generally lower interest rate environment next year, along with significantly less inflationary pressures. In the United States, fears of a recession have receded significantly of late, with economies such as the services-heavy United Kingdom recording solid growth despite weakness in large manufacturing-led economies such as Germany.
What all this means for markets is less clear. European equities, measured by region Stoke 600 The index has rebounded in 2023 from its 2022 slump, rising nearly 10% year to date and hitting an all-time intraday high on Friday. On Wall Street, S&P 500 Index So far in 2024, the index is up 17%.
Beat Wittmann, chairman and partner at Porta Advisors, told CNBC's “Squawk Box Europe” on Thursday that the VIX volatility index, which surged during the global stock market downturn in early August, has now returned to below average levels.
“The market has largely recovered in terms of price momentum, valuations and sentiment, and we're going into the seasonally soft September, October period. So I expect the market to move forward on a combination of factors, geopolitics, corporate earnings, artificial intelligence.” industry leaders,” Wittman said.
Volatility will also be attributed to “overdue corrections” and some industry rotations taking place; but “the asset class of choice for the rest of the year, especially in the 25th century and beyond, is very clearly equities,” Wittman added.
Manpreet Gill, chief investment officer for Africa, the Middle East and Europe at Standard Chartered Bank, said that even though recent comments from the Federal Reserve appear to be positive for stocks, data from the U.S. labor market (the next major report will be on September 1) Released on June 6) is still worthy of attention.
“Our benchmark remains that a (U.S.) soft landing is achievable… It almost becomes more bifurcated because as long as we avoid downside risks, equity earnings growth remains very supportive, and we're already there Positions have been cleared in the recent pullback,” Gill said.
“I think a rate cut, or at least the expectation of a rate cut, is really the last piece of the puzzle that the market is looking for. So, overall, we think it's a positive outcome,” Gill said of the risk of economic volatility due to U.S. economic data. express.
Arnaud Girod, head of economics and cross-asset strategy at Kepler Cheuvreux, told CNBC on Tuesday that bonds had a strong performance over the summer and stocks had recovered, but investors must now “have confidence” in the direction of the U.S. economy and the pace of interest rate cuts.
“I do think the more rate cuts you get, the chances are very high that (these rate cuts) will lead to negative data and therefore undermine earnings momentum. So I think it's hard to be overly optimistic,” he said.
Girod added that the stock market is also showing that there is one factor “can't care less about interest rates” as big tech stocks rally during peak rate months – which conventional wisdom says should hurt growth and tech stocks. Girod said this will make events like Nvidia's earnings a key event to watch.
Forex market focuses on interest rates
Jane Foley, head of foreign exchange strategy at Rabobank, told CNBC via email that in currency markets, attention will remain focused on the interaction between inflation, interest rate expectations and economic growth.
If the euro rises sharply against the dollar, “the deflationary impact may have some impact on market expectations about the timing of the ECB's rate cut,” she said.
Domestically, Foley continued, “the outcome of the U.S. election will have an impact on the Fed. If Trump wins, he could use executive orders to raise tariffs fairly quickly, which would stoke inflation risks and potentially shorten the Fed's easing cycle.
Rabobank now expects the Fed to cut interest rates four times between September and January before leaving rates unchanged for the remainder of 2025, providing the potential for the dollar to strengthen heading into spring.
“The BoE's actions are likely to remain constrained by services inflation, which is a function of wage inflation. This could limit the pace of rate cuts by the BoE to one per quarter,” Foley added.
