A trader works on the floor of the New York Stock Exchange on August 23, 2024.
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Central banks around the world will begin or continue cutting interest rates this fall, ending an era of record-high borrowing costs.
In September, the US Federal Reserve is almost certain to join European Central Bank, Bank of England, People’s Bank of China, Swiss National Bank, Riksbank of Sweden, Bank of Canada, Bank of Mexico and others in cutting key interest rates, which have been held at levels not seen since before the 2007-2008 financial crisis.
Money markets have fully priced in the possibility of a Fed rate cut, but last week investors became more confident in the upcoming easing path.
At the Jackson Hole annual conference, Fed Chairman Jerome Powell doesn’t just talk “It is time for policy to adjust,” but the central bank can now focus on doing “everything” possible to maintain a strong labor market and continue to control inflation.
Current prices indicate high expectations for three 25 basis point cuts by the Fed before the end of the year, according to the CME FedWatch tool. That would keep the Fed in line with its peers, even though it is acting later.
The European Central Bank is expected to cut interest rates by 25 basis points at least three times this year; and the Bank of England will cut rates by the same amount a total of three times, according to LSEG data. All three central banks are expected to continue monetary easing until at least early 2025, even if stickiness in service inflation continues to pose a challenge for policymakers.
For the global economy, that means a lower interest rate environment next year, along with significant downward pressure on inflation. In the United States, recession fears have spiked recently. has largely diminishedand while there is weakness in large manufacturing-oriented economies like Germany, economies like the UK that are more focused on services are recorded solid growth.
What all that means for markets remains unclear. European stocks, measured by region Stoxx 600 Stocks index, rebounding in 2023 after a downturn in 2022 and rising nearly 10% for the year to date to hit an intraday record high on Friday. On Wall Street, S&P 500 This index is 17% higher as of now in 2024.
The VIX Volatility Index — which spiked amid a global stock market downturn in early August — has returned to below-average levels, Beat Wittmann, president and partner at Porta Advisors, told CNBC’s “Squawk Box Europe” on Thursday.
“The market, in terms of momentum, valuations, sentiment, has recovered quite a bit and we’re entering a seasonally weak September, October. So I expect the market to be volatile driven by a number of factors, geopolitics, corporate earnings, drivers like AI,” Wittmann said.
Volatility will also occur due to “overdue consolidation correction” and some sector rotation; but Wittmann added that “the asset class of choice here is clearly equities for the rest of this year, and especially from 2025 onwards.”
Manpreet Gill, chief investment officer for Africa, Middle East and Europe at Standard Chartered, told CNBC’s “Capital Connection” on Monday that even if the Fed’s recent comments appear to be supportive of stocks, data from the U.S. jobs market — with the next key report scheduled for release on September 6 — remains important to watch.
“Our facility is still very much [U.S.] soft landing is achievable… It almost becomes a little bit more binary, because as long as we avoid that downside risk, equity earnings growth remains very supportive and we’ve had a clean slate in the recent pullback,” Gill said.
“I think a rate cut, or at least the expectation of one, is really the last thing the market is looking for. So overall we think that’s a positive outcome,” Gill said, referring to the risk of U.S. economic data causing volatility in the coming months.
Arnaud Girod, chief economist and cross-asset strategist at Kepler Cheuvreux, told CNBC on Tuesday that bonds had a strong summer and stocks have recovered; but investors now have to “have confidence” in the direction of the U.S. economy and the pace of rate cuts.
“I actually think the more you cut interest rates, the more likely it is that [these cuts are] comes with negative data and therefore the earnings decline momentum is very high. So I think it’s hard to be too optimistic,” he said.
Meanwhile, the stock market has shown that there is a factor that it “doesn’t care about interest rates,” Girod added, as Big Tech has rallied during peak interest-rate months — which, conventional wisdom would suggest, would hurt growth and tech stocks. That would keep events like Nvidia earnings are important factors to consider, according to Girod.
FX focuses on exchange rates
Jane Foley, head of foreign exchange strategy at Rabobank, told CNBC via email that in the currency markets, attention will remain on the interplay between inflation, interest rate expectations and economic growth.
If the euro strengthens significantly against the dollar, “the deflationary implications could have some impact on market expectations regarding the timing of a rate cut by the ECB,” she said.
On the US side, Foley continued, “the outcome of the US election will have an impact on the Fed. If Trump wins, he could use an executive order to raise taxes quite quickly, which would boost inflation risks and could cut short the Fed’s easing cycle.”
Rabobank now forecasts the Fed will cut rates four times between September and January, then keep them on hold through 2025, setting the stage for a stronger US dollar in the spring.
“The BOE is likely to remain constrained by service sector inflation, which is a function of wage inflation. This could limit the pace of BOE rate cuts to once a quarter,” Foley added.
