Federal Reserve Delivers Larger-Than-Expected Rate Cut
The Federal Reserve took centre stage this week, cutting the federal funds rate by 50bps to 4.75%-5%. This marked the first rate cut by the Fed in four years and was larger than some market participants had anticipated. The decision significantly impacted market sentiment and performance throughout the week, with initial surges in stock prices followed by a more tempered response as investors digested the implications of the Fed's forward guidance. Additionally, U.S. Treasury yields ended the week higher even after the outsized rate cut, with the 10-year yield rising 8bps over the week.
Equity Markets Experience Volatility Amid Rate Cut News
Stock markets initially surged on the Fed's rate cut announcement, however they ultimately closed lower after Fed Chair Powell indicated this large initial cut did not necessarily mean more significant cuts would follow. However, the S&P 500 and Dow Jones hit record highs later in the week, with the Dow Jones closing above 42,000 for the first time. Despite the fluctuations, the S&P 500 finished the week up 1.2%, the Dow Jones up 1%, and the Nasdaq composite also saw gains, ending the week up 2%. This significant volatility during the week highlighted the complex interplay between monetary policy decisions and market expectations.
Global Central Banks and Economic Data in Focus
The week was marked by a flurry of central bank activity and economic data releases, with the Bank of England and Bank of Japan holding monetary policy meetings this week, with no changes to interest rates from either. This highlights the diverging paths of major central banks as policymakers assess the unique economic factors at play in their specific region. On the economic data front, despite expectations of a decline, US retail sales figures for August slightly increased, following a more significant increase the previous month. The US industrial production figures also exceeded expectations, with the level of industrial output achieving the biggest monthly gain since February 2024. In the UK, inflation held steady at 2.2% in August, slightly above target, although a considerable reduction from levels seen in the previous year. In Canada, the August inflation figures hit central bank targets, with CPI cooling to 2%.
Commodities Shine as Gold Reaches New Heights
In the commodities sector, gold prices traded near record highs above $2,600 per ounce. This surge in gold prices can be attributed to several factors, including the incoming lower interest rate environment, increased economic uncertainty, and investors seeking safe-haven assets. The precious metal's performance underscores its enduring appeal as a value store during market volatility and policy shifts. With continued monetary easing on the horizon and increased geopolitical uncertainty, all eyes will be on gold prices towards the end of 2024. Additionally, oil prices recorded a second straight week of gains, with momentum from the Fed’s interest rate cut and a reduction in U.S. supply, reversing the slump seen earlier in the month.
Looking Ahead
As we move forward, investors will be closely monitoring any signals about future monetary policy decisions from central banks, with continued uncertainty about the pace and extent of further cuts towards the end of 2024. The interplay between central bank actions, economic data releases, and corporate performance will continue to shape the investment landscape in the coming weeks and months. The final quarter of 2024 will be crucial in achieving further clarity on the trajectory of global economic growth and the effectiveness of monetary policy in supporting financial markets.