Market Musings 210924: Fed fires the starting gun
Fed Podcast: (click on link below)
Fed: The rate-cutting cycle has started with a bang (6 min podcast)
Weekly podcast: (click on link below)
Investing in insurance: what's the claim? (11 min podcast)
Summary:
The Federal Reserve starts its US rate-cutting cycle with a “jumbo” 50 basis point cut (0.5%), taking its benchmark interest rate below 5% for the first time since 2023.
1. 2-year US Treasury bond yield at 3.6% points to further rate cuts to come
The gap between the Fed Funds rate (blue) and the 2-year Treasury bond yield (red) remains at historic highs despite this first rate cut. The bond market is expecting the Fed to cut substantially further over the next 12 months, with the Fed themselves pointing to a 3.25% Fed Funds rate by the end of 2025.
3.25% is likely the “neutral” interest rate for the US economy, the rate at which there is neither a boost nor a drag from interest rates on growth.
Fed cuts Fed Funds interest rate to below 5%
2. Positive reaction from US stocks, sending the S&P 500 to a new high
Since July, note the continued outperformance of the equal-weight version of the S&P 500, as the Magnificent 7 stocks struggle to regain the positive momentum they demonstrated for the first 6 months of the year.
3. US dollar continues its weak trend, with sterling one of the gainers
Since the markets expect the Fed to cut interest rates faster than other central banks around the world (including in the UK and the Eurozone), the US dollar (represented by the DXY US dollar index in blue) is being undermined by the narrowing interest rate gap. The pound sterling remains one of the strongest currency pairs against the USD (in green), now above $1.33 for the first time since early 2022.
4. Gold (and silver) continue to benefit from a weaker US dollar, lower interest rates
This week, the gold price (in blue) hit another all-time high, breaching the $2600/ounce level for the…
