This fall, central banks around the world are preparing to start or continue cutting interest rates, ending an era of historically high borrowing costs.
In September, the Fed is all but certain to join the European Central Bank, the Bank of England, the People’s Bank of China, the Swiss National Bank, the Swedish Riksbank, the Bank of Canada, the Banco de Mexico and others in cutting key interest rates, which have remained at levels not seen since before the 2007-2008 financial crisis.
Money markets have already fully priced in the Fed’s rate cuts, but last week investors’ confidence in the future path of easing grew further.
At the annual Jackson Hole Symposium, Federal Reserve Chairman Jerome Powell not only said that "the time has come for a policy adjustment," but also that the central bank can now focus equally on keeping the labor market strong and continuing to fight inflation.
Current pricing suggests high market expectations for three 25 basis point rate cuts by the Federal Reserve before the end of the year, which would put the Fed roughly in line with its peers, albeit acting slightly later, according to data from the CME Group’s FedWatch tool.
The European Central Bank is expected to cut interest rates at least three times this year, by 25 basis points each time; the Bank of England is expected to do the same three times, and according to LSEG data, all three major central banks are expected to continue monetary easing until at least early 2025, even if the stickiness of services sector inflation continues to bother policymakers.
For the global economy, this means a broadly low interest rate environment and much less inflationary pressure next year. In the United States, recent recession fears have eased significantly, and although large manufacturing economies like Germany are weak, countries such as the service-oriented United Kingdom are showing solid growth.
The impact of these changes on markets is unclear. European stocks, as measured by the regional Stoxx 600 index, have rebounded from a slump in 2022 and are up nearly 10% so far this year, reaching an intraday record high on Friday. On Wall Street, the S&P 500 has risen 17% so far this year.
The VIX volatility index — which spiked in early August as global stocks slumped — is now back below average, Beat Wittmann, chairman and partner at Porta Advisors, told CNBC’s “Squawk Box Europe” on Thursday.
"The market has largely recovered in terms of price momentum, valuations and sentiment, and we are entering the seasonally weak September and October. I expect the market to fluctuate on various factors, such as geopolitics, corporate earnings, especially from the field of artificial intelligence," Wittmann said.
Wittmann also added that market volatility will also be affected by "overdue consolidation corrections" and rotations in certain sectors; but "the preferred asset class for the rest of the year and especially into 2025 and beyond is very clear: equities."
While recent comments from the Federal Reserve appear to be bullish for stocks, Manpreet Gill, Standard Chartered’s chief investment officer for Africa, the Middle East and Europe, told CNBC’s “Capital Connection” on Monday that data from the U.S. jobs market — the next key report is due on Sept. 6 — still needs to be watched closely.
“We still think a soft landing is feasible ... It’s almost becoming a little binary because as long as we avoid downside risk, equity earnings growth remains very favorable and we’ve had a bit of a ‘clearance’ in the recent pullback,” Gill said.
“I think a rate cut, or at least expectations of a rate cut, is really the final piece of the puzzle that the market was waiting for. So overall we think it’s a positive outcome,” Gill said, referring to the risk of volatility that could be spurred by U.S. economic data in the coming months.
Arnaud Girod, head of economics and cross-asset strategy at Kepler Cheuvreux, told CNBC on Tuesday that bonds had a strong summer and stocks have recovered, but investors now have to "use faith" to judge the direction of the U.S. economy and the pace of rate cuts.
“I really think the more rate cuts you get, the more likely it is that those rate cuts will be accompanied by negative data, leading to less earnings momentum. So I think it’s hard to be too optimistic,” he said.
Meanwhile, the stock market has shown a degree of “indifference to interest rates,” Girod added, as tech giants have surged during peak interest rates — something that conventional wisdom would suggest should hurt growth and tech stocks. That will make Nvidia’s results a key one to watch, according to Girod.
The article is forwarded from: Jinshi Data