The S&P 500 hit a new record high yesterday, up 0.47% to 6,615.28. Futures contracts on the index are up 0.21% this morning.
The optimism is being driven by baked-in expectations that the U.S. Federal Reserve will deliver a 0.25% interest rate cut tomorrow. The cliché here is that the markets appear to have bought on the rumour of the cut, and once Chairman Jerome Powell delivers it, will lock in those profits by selling on the news. CME’s Fed Funds futures market—usually an accurate predictor— says there is a 96.1% chance of the Fed delivering a 25bps cut to the 4% level on Wednesday.
The Fed is likely to cut by 25bps and not 50 because central banks like to keep their weapons in reserve for the future. The faster you shoot your bullets, the more quickly you run out of bullets, basically.
So the meeting will be boringly predictable, right?
Nope.
Markets will move on Wednesday after Wall Street parses Powell’s statement and his Q&A for clues about future rate cuts beyond Wednesday.
“A 25bp rate cut is fully priced in, with a slim chance of a larger 50bp move following recent signs of labor market cooling. Investors will focus on the Fed’s updated macro projections—especially the rate path—with expectations leaning toward continued easing through year-end. The vote split will also be closely watched, as a three-way division among FOMC members hasn’t occurred since 2019,” Convera’s George Vessey told clients.
In all these potential scenarios the Fed is expected to continue delivering new rounds of cheaper money in the future—and that will be bullish for stocks. There’s only one thing going down in all of this: lower interest rates on the dollar sank the currency to its lowest point year-to-date. The USD lost 0.87% of its value on the DXY index in the last month—that’s a lot for a currency. It has lost 10.56% year-to-date.
Here’s a snapshot of the markets globally this morning:
