Macro: Sandcastle economics
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Key Stories from the past week: Jumbo rate cut, but outlook still hazy.
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A big week for rate decisions. This week saw the outcome of the long awaiting FED rate decision which resulted in a significant 50 basis point cut, while penciling another 50bps of cuts before year end. Bank of England kept benchmark rate unchanged and Bank of Japan followed suit keeping rate levels unchanged at 0.25% as widely expected, and global equities seemed to rally on Thursday following the rate decisions, in hopes of a softer landing. Market reactions are mixed towards the end of the week – read more in this week’s key stories below:
The Federal Reserve go big……
The Fed cut rates by a sizeable 50 basis points as policymaker’s said they see risks to employment, while inflation goals are in better balance. The Fed is penciling in another 50-basis point worth of cuts before year end, suggesting an additional 25bps cut at each of the remaining two 2024 meetings. Despite the surprise move, markets ended the day lower, and 61% of Saxo Bank clients trading in the US500 index have been selling this week. However, historically rate cut cycles have been followed by strong equity performance, suggesting a potential need to adjust portfolios toward sectors like consumer discretionary, construction and energy.
Fed's Jumbo Rate Cut: Short-Term Goldilocks, Long-Term Volatility
……while Bank of Japan left rates unchanged
BOJ kept its interest rates unchanged at 0.25%, as expected. Governor Ueda's dovish remarks indicate caution on further rate hikes, with inflation risks easing and wage growth being closely monitored. The BOJ is also waiting for more data on services prices and wage trends before making any decisions. The yen's bullish outlook remains, but gains may be gradual due to the patient approach of both the Fed and the BOJ. Yen could still serve as a defensive hedge amid rising geopolitical risks, with more strength likely requiring a sharper downturn in the U.S. economy.
JPY: Bank of Japan's Tapering Hawkishness
Gold reached new highs, again.
Gold has surged this week as borrowing costs are now on a downward arc, potentially drawing further funds into gold-backed ETFs. Recent rising US recession risks have also given bullion a boost as a haven play. Silver also joined the party supported by industrial metal strength. Saxo clients are using Futures and spot metals to gain desired exposure. XAUUSD is relatively even buy/sell split among Saxo client base, while silver futures have skewed selling as clients take profits.
With gold reaching new heights, silver show potential
Next week markets will be closely monitoring for signs of economic strength/weakness to determine the impact of the 50 basis point cut decision in the US and the medium term outlook for further potential cuts. On Wednesday Micron technology will report earnings as we come to towards a close of the earnings season.
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