Just a few weeks ago markets had been pricing in only an 18% chance of a 50bps cut, although on the day of the meeting this had increased to 70%, perhaps providing the Fed some cushion to enact the move without jolting markets. Market reaction on Wednesday was actually somewhat muted, with slight weakness in the major indices. However, the following session saw the S&P 500 and Dow Jones Industrial Average jump to record highs, with investors cheering the jumbo move and hopes of a soft landing for the economy.
The rally was unable to carry across to Friday’s session, but indices still saw gains. The S&P 500 was up 1.4%, with gains broad-based and the utilities sector ending the week at an all-time high. The Dow Jones closed at a new high, gaining 1.6% while the tech-heavy Nasdaq added 1.5%. Small caps which tend to be more sensitive to interest rates outperformed, with the Russell 2000 index advancing 1.9%. Economic data for the week was generally positive, with weekly jobless claims dropping by more-than-expected, reaching their lowest level since mid-May, while retail sales unexpectedly climbed in August. The Treasury curve continued to steepen, with the 10-year Treasury yield rising modestly even after the Fed cut.
Similar to the US, European equity markets saw a strong rally on Thursday in response to the Fed. However, momentum reversed course on Friday wiping out the gains and putting the STOXX 600 modestly lower for the week. Regional indices did however manage to post slight gains, with the UK FTSE 100 as an exception, down 0.5%. UK inflation held at 2.2% in August, however services inflation, a closely watched measure by the Bank of England (BoE), ticked higher, cementing expectations for the central bank to remain on hold. Indeed, on Thursday the Monetary Policy Committee voted 8-1 in favour of maintaining rates, although markets currently expect a cut in November.
Another central bank on hold was the Bank of Japan (BoJ), leaving its short-term interest rate at 0.25%, following on from its July hike that jolted markets. Despite this the BoJ seems likely to hike rates later this year, with this expectation boosted as Japan’s core consumer price index increased 2.8% in August. The yen weakened against the US dollar. It was a holiday shortened week for Chinese equities however they managed to log gains. The Hang Seng surged over 5% and on the mainland the Shanghai Composite was up 1.2%. This was even with the latest economic data continuing to cast doubts over the strength of the economic rebound, with retail sales, fixed asset investment and industrial production all missing expectations. The People’s Bank of China made no changes to its policy, while the Hong Kong Monetary Authority cut rates by 50bps in tandem with the Fed.