Global Market Overview

Despite initial uncertainty, major indices have started to react positively to the Fed's unexpectedly high rate cut, with futures markets showing a 1.1% higher open in the US and a 1% higher open in Europe. In Asia, the Japanese equity market also benefited, rising 2%, in contrast to the downward pressure experienced in the currency market. This market resurgence comes as the initial volatility following the FOMC announcement begins to subside, with the market now starting to digest the implications of this 50bps rate cut.

U.S. Economic Developments

After the Federal Reserve delivered a surprise 50bps rate cut, the federal funds rate target was updated to 4.75-5.00%. This move was more aggressive than the market had anticipated, with a 60% probability priced in for a 50bps cut. The dot plot showed a downward revision of the 2024 median rate forecast to 4.4% from 5.1%, implying a further 50bps of easing from current levels, with an additional 100bps of easing indicated for 2025. However, Fed Chair Jerome Powell used the press conference to stress that the bigger rate cut comes from a position of strength, remaining upbeat on the economy despite signs of loosening in the labour market. He also reiterated that the Fed is not on a pre-determined path and that decisions will be made on a meeting-by-meeting basis, so the FOMC will go quicker, slower, or even pause if appropriate.

UK Economy

In the UK, August inflation data aligned with expectations, with the headline figure unchanged at 2.2% YoY, however services inflation rose to 5.6% YoY from 5.2% in July. The persistence of inflation in the services sector is particularly noteworthy, as it often reflects wage pressure, which can be more challenging to reverse. The Bank of England is due to make its interest rate decision later in the week, and while no change in interest rates is expected, the Fed cut has increased the pressure to accelerate easing towards the end of 2024. The market is currently pricing in 50bps of rate cuts through to the end of the year, however, with inflation pressures still present, the Bank of England may take this as an opportunity to push back on market expectations.

Global Economic Landscape

Australia's unemployment rate remained steady in August at 4.2%, with the participation rate at a record high of 67.1%. This indicates that the labour market is still operating very close to recent historical tightness, potentially influencing the Reserve Bank of Australia's future rate decisions. Consequently, the market has lowered the prospect of a rate cut before year-end from 85% to 70%.

In the commodities market, gold rose to a record high just shy of $2,600, however, it began to pull back after the FOMC signalled policymakers are in no rush to aggressively lower interest rates following Wednesday’s 50bps cut. At the same time, crude oil prices moved lower as the larger rate cut raised concerns about the underlying health of the U.S. economy despite the decline in crude oil inventory, which helped to stem the fall.

Investment Outlook

The current market environment is characterised by increased uncertainty as investors process the implications of the Fed's significant rate cut. As we move through to the final quarter of 2024, investors should remain prepared for potential volatility. Economic data, central bank policies, and geopolitical developments will continue to dictate market movements in the coming months. Particular attention will be paid to the central bank interest rate decisions from the Bank of England on Thursday and the Bank of Japan on Friday.