It’s the week after the historic Fed rate cut, a 50bps move which saw Chair Powell go all in for a ‘soft landing’. Markets were told they should not expect this size of policy easing to be the norm, due to a relatively solid economy. A gradual move of policy back to neutral, which is nearer 3% than previously thought, is the intention. The updated median dot plot pointed to two quarter point reductions in November and December, and then four next year. This policy path is now seen as longer and more gradual. However, we note that futures markets have still been pricing in nearly three-quarters of a percentage point of cuts for 2024.
Stocks have enjoyed the jumbo-sized bump with record highs seen last week. Lower interest rates are generally considered positive for stocks, especially in high-growth sectors like tech as they encourage economic growth, reduce companies’ debt burdens and spur investments in riskier assets. Small caps, which have higher average levels of debt, have also jumped. Interestingly, according to the investment bank JPMorgan, the Fed has cut rates 12 times with the S&P 500 within 1% of an all-time high. The market was higher a year later all 12 times, with an average return of around 15%.
This week’s key data point will the US personal income and spending report published on Friday, which has the core PCE deflator measure in it. This should confirm that inflation is yesterday’s story and not a barrier to more rate cuts.  Gold bugs will be watching on after a strong close last week into fresh all-time highs. History tells us the precious metal has surged in the last six Fed easing cycles, so more peaks seem likely, especially with an underlying safe haven bid.