On Wednesday, the stock and bond markets reacted coldly to the Fed's 50 basis point rate cut, but optimism was rekindled on Thursday. The three major U.S. stock indexes opened higher, with the S&P 500 hitting a new intraday record high.

Dario Perkins, managing director of global macro at TS Lombard, said he never doubted the ability of Federal Reserve Chairman Powell and he viewed the 50 basis point rate cut more as a sign of victory in the fight against inflation than a warning of an imminent collapse of the U.S. economy.

"It's important to remember that the Fed's monetary policy settings over the past two-plus years were made in the face of a very different macro environment than the current one - inflation was at multi-decade highs, the labor market was deeply imbalanced, and policymakers were afraid of a repeat of the mistakes of the 1970s. Given the complete reversal of all these trends, it's clear that Fed officials were able to justify a 50 basis point rate cut without unsettling markets or creating an undue sense of panic," he said.

He added that the U.S. no longer needs "monetary tightening at emergency levels," which should be positive for risk assets.

Perkins said a 1995-style script is now playing out again for the economy and markets.

The economy looks similar to 1995 (ISM index on the left; unemployment claims on the right)

“This is not only a textbook example of the ‘soft landing’ the Fed is now hoping to achieve, but also a ‘recalibration’ (rather than a full reversal) of monetary policy over the medium term, where the central bank lowers interest rates to a neutral level after a period of deliberately restrictive policy,” he said.

Perkins did not rule out a recession but said it would be mild given the absence of major financial imbalances and continued fiscal policy support. "We think investors are underestimating the resilience of the U.S. economy and that even if a recession occurs, it will likely be very mild by historical standards," he said.

In his view, the bond market is pricing in too much monetary easing. "We expect a secular bond bear market with higher lows and higher highs in yields in the 2020s, even if monetary policy goes beyond that trajectory in the short term," he said.

He remains optimistic on the stock market after coming up with his own recession indicator, creatively named the Perkins Rule, which states that a recession is signaled by a contraction in employment, not a gradual rise in unemployment.

Investors should sell stocks only if job growth turns negative, he said. "Remember, you don't need to predict a recession to trade stocks, you just need to recognize it after the recession process begins," he said. "Given investors' confidence in the Fed's put option, the stock market will always give you an opportunity to exit risk assets before it's too late."

Article forwarded from: Jinshi Data