Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
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The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
In the news:
Macro:
Macro events: China’s PBoC LPR, Bank of Japan Policy Announcement, Quad Witching
Earnings: Tamboran
Equities: On Thursday afternoon, US stocks soared following the Federal Reserve’s 50 basis point rate cut, fueling optimism for a "soft landing" of the US economy. The Dow Jones jumped over 500 points, while the S&P 500 rose by 1.7%, both reaching new record highs. The Nasdaq 100 surged 2.7%, leading the market gains as investors welcomed the Fed's efforts to stabilize growth. Tech stocks were at the forefront, with Nvidia and AMD rising 5% and 7% respectively while Tesla and Meta climbed 7.3% and 4%. Economic growth sectors like financials and industrials also saw gains; JPMorgan Chase climbed 1.8%, while Caterpillar and Home Depot advanced 4.8% and 1.5%, respectively. The rally extended to small-cap stocks, marking their seventh consecutive session of gains, with the Russell 2000 gaining 2.1%. The broad market rise indicated increased confidence in the Fed’s capability to control inflation while maintaining economic growth, further supported by a larger-than-anticipated decline in weekly jobless claims.
Fixed income: Treasury yields closed with mixed results. Short-term yields outperformed, while intermediate to long-term yields rose, leading to a sharp steepening of the 2s10s and 5s30s spreads. No new catalyst drove this price action as investors continued to digest Wednesday's FOMC meeting, extending the post-decision steepening trend. In SOFR options, larger flows turned hawkish, aiming to reduce the Fed cut premium priced into this year's remaining two meetings. front-end Treasury yields were up by about 2 basis points, while yields from the belly out to the long end were down by 1.5 to 4.5 basis points. This steepening move widened the 2s10s and 5s30s spreads by 5.5 and 3.5 basis points, respectively, building on Wednesday’s post-FOMC curve movements. There was minimal activity in swaps, with Fed-OIS pricing in around 70 basis points of combined easing over the next two policy meetings, suggesting at least one half-point cut. Further out, roughly 200 basis points of additional cuts were priced in by the end of next year. Former Treasury Secretary Lawrence Summers remarked that inflation would likely prevent the Federal Reserve from lowering interest rates as much as anticipated in the coming years.
Commodities: WTI crude oil futures closed at $71.95 per barrel, marking an increase of 1.47%, while Brent crude prices settled at $74.88 per barrel, up by 1.67%, driven by expectations of stronger global energy demand and higher risk premiums due to rising tensions in the Middle East. Gold prices climbed by 1.09%, settling at $2,586 an ounce, maintaining record highs for the precious metal. Silver surged by 2.3% to around $31 per ounce, reversing losses from the previous session as the dollar retreated from recent highs, alleviating downward pressure on commodity prices.
FX: As the markets digested the Fed’s 50bps rate cut, a broad risk-on environment prevailed. The US dollar was choppy but ended the day lower, and the Norwegian krone (NOK) led the gains as the Norges Bank continued to highlight postponement of rate cuts to 2025. NOK was up 0.9% against the USD and over 1% against the Japanese yen and Swiss franc, which tumbled due to the risk-on environment. The Australian dollar and British pound also gained, the formed aided by Australia’s strong employment data and the latter helped by Bank of England’s hold decision and a cautious approach to cutting rates. The Japanese yen will be bracing for the Bank of Japan announcement today where no rate hike is expected, but a hawkish rhetoric could bring back some gains after the currency has been hurt despite the Fed’s 50bps rate cut.
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