In a week marked by crucial financial decisions, US equity investors are closely monitoring the Federal Reserve's forthcoming commentary and interest-rate forecasts, with indications suggesting that a substantial 50 basis-point cut is becoming the predominant policy consideration. As observed through the FedWatch Tool, the likelihood of this larger rate cut scheduled for September 18 has surged to 59%, a significant increase from just 30% a week prior.
This shift follows the recent release of inflation data on September 11 and 12, prompting a reevaluation of potential fiscal strategies by the Fed. The remaining probability now stands at 41%, indicating a possibility of a 25 basis-point reduction instead, although this too reflects a marked adjustment from the earlier 70% likelihood of the smaller cut. As outlined by Derek Holt, head of capital markets economics at Scotiabank, two primary concerns weigh on investor sentiment: the magnitude of the impending rate cut and the Fed's communicated trajectory for future fiscal policy.
In tandem with this decision, the Federal Reserve will unveil its quarterly Summary of Economic Projections, a document that will provide updated macroeconomic forecasts, alongside the influential 'dot plot' that reveals policymakers' perspectives on interest rates. The data reflecting the Fed's dual mandate since its last decision on July 31 has been interpreted as 'incrementally dovish' by Holt, thus justifying speculation surrounding the possibility of a more considerable rate reduction.
Notably, the nonfarm payrolls experienced a modest increase of only 89,000 in July, followed by 142,000 in August. Although core inflation patterns have shown some variability, the overall trend appears to be easing. This observation aligns with the concerns voiced by Fed Chair Jerome Powell regarding the labor market, as he vowed to employ all available measures to bolster it while striving for sustained price stability. However, Holt warns that increasing the cuts might indicate that the Fed is excessively alarmed by current economic conditions.
He advocates for a more conservative approach, suggesting that smaller cuts would better reflect the current situation. Supporting this view, the US economy demonstrated robust growth of 3% in the second quarter, with the 'nowcast' estimates from the Atlanta and New York Federal Reserve indicating a projected 2.5% growth for Q3.
Holt affirms that 'the soft landing we've always expected continues to unfold,' reflecting an optimistic outlook. In terms of market movements, both the 10-year and two-year Treasury yields experienced declines last week, with the two-year yield reaching its lowest point in the past year, demonstrating investor sentiment and market dynamics at play.
As the week progresses, the 10-year yield has begun to trend downward as well, suggesting a cautious optimism among investors. On the corporate front, US retail sales data is scheduled for release on Tuesday, just one day ahead of the Federal Open Market Committee (FOMC) decision. This timing is critical as investors look to glean insights that might influence market movements.
Additionally, several prominent companies are set to disclose their quarterly results this week, including General Mills ($GIS), FedEx ($FDX), and Lennar ($LEN), all of which are expected to draw attention amid the broader economic developments..